It's been coming for three years, but now the day of tax reckoning for higher-income investors has finally arrived.
Caution: For the first time, you may have to pay the 3.8% Medicare surtax on "net investment income" (Nii) on your 2013 tax return. The tax is computed on Form 8960, Net Investment Income Tax—Individuals, Estates, and Trusts.
The IRS recently issued new regulations clarifying the rules concerning the imposition of this new and long-dreaded tax.
Background: Beginning in 2013, the 3.8% Medicare surtax applies to the lesser of Nii or the excess of modified adjusted gross income (MAGI) over an annual threshold.
The threshold is $200,000 for single filers and $250,000 for married joint-filing couples.
For this purpose, Nii includes the following:
1. Interest and dividends
2. Distributions from annuities
3. Rent and royalties
4. Income and gains from passive business activities
5. Income and gains from the business of trading in financial instruments and commodities
6. Net capital gain from the sale of investments and property (other than property held in a nonpassive business activity.
On the other hand, the following items are excluded from the definition of Nii:
1. Wages
2. Distributions from IRAs and qualified retirement plans
3. Social Security benefits
4. Income and gains from nonpassive business activities
5. Self-employment income
6. Gain on the sale of nonpassive interests in a partnership, S corporation or limited liability company
7. Income from tax-exempt municipal bonds
8. Tax-deferred income from nonqualified annuities
9. The portion of capital gain excluded from tax on the sale of a principal residence.
The new regulations include several technical changes and clarifications.
As always, should you have any questions or concerns regarding your situation please feel free to call.
DiSabatino CPA
651 Via Alondra, Suite 715
Camarillo, CA 93012
Phone: 805-389-7300
Fax: 805-435-7498