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December 20, 2012 at 08:40 AM
While we are all hanging on the “fiscal cliff” and wondering what will happen in Congress, there are two new taxes that will definitely become effective Jan. 1.
Regardless of what comes of the fiscal cliff negotiations, a new Net Investment Income Tax goes into effect starting in 2013. The 3.8% tax applies to individuals and estates and trusts that have certain investment income above threshold amounts. It is part of President Barack Obama’s Affordable Care Act and Medicare overhaul. Also, a new Additional Medicare Tax goes into effect in 2013 as well. The 0.9% tax applies to an individual’s wages, Railroad Retirement Tax Act compensation and self-employment income that exceeds a threshold amount based on the individual’s filing status.
The IRS recently released proposed regulations concerning the two new taxes and how they will apply.
The Net Investment Tax
What is the net investment tax?
Individuals will owe the tax if they have “net investment income” and also have modified adjusted gross income over the following thresholds:
| Filing Status |
Threshold Amount |
| Married filing jointly |
$250,000 |
| Married filing separately |
$125,000 |
| Single |
$200,000 |
| Head of household (with qualifying person) |
$200,000 |
| Qualifying widow(er) with dependent child |
$250,000 |
What is net investment income?
Net investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, nonqualified annuities, income from businesses involved in trading of financial instruments or commodities and businesses that are passive activities. Net investment income is reduced by certain expenses properly allocable to the income.
Estates and trusts are subject to the tax if they have undistributed net investment income and also have adjusted gross income over the dollar amount at which the highest tax bracket for an estate or trust begins for such taxable year (for tax year 2012, this threshold amount is $11,650).
The tax will not apply to any gain that is excluded from gross income for regular income tax purposes. For example, the first $250,000 ($500,000 for a married couple) of gain recognized on the sale of a principal residence is exempted from gross income for regular income tax purposes and, thus, from the net investment tax as well.
Investment expenses, such as investment advisory and brokerage fees, expenses related to rental and royalty income and state and local income taxes may be deductible in arriving at net investment income.
For individuals, the tax will be reported on, and paid with, Form 1040. For estates and trusts, the tax will be reported on, and paid with, Form 1041.
