futa tax blog_jrs_Jan 2012Beginning in 2013, pursuant to the Affordable Care Act, a new 3.8 percent net investment income tax (NIIT) applies to taxpayer’s with a modified adjusted gross income (MAGI) above the applicable thresholds below (not indexed for inflation).

  • Single filers – $200,000
  • Married filing jointly (including surviving spouses) – $250,000
  • Married filing separately – $125,000
  • Head of household (with qualifying person) – $200,000
  • Trusts and estates – $11,950 (for 2013) on undistributed net investment income

Investment income generally includes gross income from the following sources:

  • Interest, dividends, non-qualified annuities and royalties
  • Rents (unless received in the ordinary course of a trade or business which is not a passive activity)
  • Capital gains on stocks, bonds, mutual funds and investment real estate (including a second home)
  • Income from a passive activity trade or business

However, the aforementioned gross investment income items are reduced by certain expenses/deductions to arrive at the amount subject to the 3.8% NIIT.  The following expenses properly allocable to items of gross investment income include:

  • Investment interest expense (to the extent allowed as an itemized deduction)
  • Investment advisory and tax preparation fees
  • Expenses related to rental and royalty income
  • Business deductions allocable to a passive activity trade or business
  • State and local income taxes
  • Penalties on early withdrawal of savings
  • Capital losses and capital loss carryovers to the extent of gains on stocks, bonds, mutual funds and investment real estate

For example, if a married couple filing jointly has $200,000 of wage income and $100,000 of interest and dividend income after allocable deductions (MAGI totaling $300,000), the 3.8% tax on net investment income applies to the $50,000 (the amount over the $250,000 MAGI threshold).

There are many tax planning ideas that should be considered by taxpayers subject to the 3.8% NIIT.  A few of the more prevalent considerations are as follows:

  • Tax loss harvesting becomes more important, especially for taxpayers in the new 39.6% tax bracket
  • Tax exempt income investments may be more desirable
  • Owners of pass-through entities may want to take action to materially participate
  • Aggregation tax election for taxpayer with multiple rental properties may be necessary

This is only a brief overview of the 3.8% NIIT and is not intended to be exhaustive, so please contact us to discuss the various tax planning strategies available to your unique situation.

-John Scaglione, RTRP