In order to help fund the Affordable Care Act, Congress enacted two new taxes for 2013 that will affect roughly 3% of American taxpayers, the Net Investment Income Tax (NIIT) and the Additional Medicare Tax. We offer a general outline of these taxes to help you understand how they might affect you. For tax advice that is specific to you and your finances, always consult a professional.
Am I subject to these taxes?
In order to be subject to either the NIIT or the Additional Medicare Tax, a filer must meet a minimum income threshold.
The threshold for the Additional Medicare Tax is based on wages, compensation, and self-employment income. Any amount earned above the threshold will be subject to the 0.9% tax.
For the NIIT, the threshold is based on filer’s Modified Adjusted Gross Income (MAGI). MAGI, for most taxpayers, is identical to Adjusted Gross Income (AGI). The exceptions are those who have foreign-earned income that was excluded from their AGI. This income is included in the MAGI calculation. Taxpayers who have net investment income and whose MAGI exceeds the threshold will owe this tax.
The thresholds for both taxes are as follows:
|Single or Head of Household||$200,000|
|Married Filing Jointly||$250,000|
|Married Filing Separately||$125,000|
What will be my NIIT obligation?
The amount of interest income subject to the NIIT is determined by the lesser of two numbers:
1) The taxpayer’s MAGI in excess of the threshold, or
2) The taxpayer’s net investment income.
If either of these numbers is zero, the filer is not subject to the NIIT. If either number is greater than zero, then the lesser number is taxed at a rate of 3.8%.
What counts as “net investment income?”
Generally speaking, net investment income includes three categories:
1) Income from interest, dividends, rent, royalties, or annuities
2) Income from businesses that are passive activities to the taxpayer
3) Income from the sale of property
The first category exempts distributions from qualified retirement plans. Income from property sales does not include the first $250,000 (or $500,00 for married joint filers) from the sale of a personal residence.
If a the filer does not “materially participate” in income-generating activities, then the income is considered to be from the filer’s “passive activities,” making it subject to the NIIT. The IRS lists seven tests, most of which focus on the amount of time the taxpayer spends engaged in the activity, to determine material participation. If you are unsure whether you meet these tests for one or more of your income-generating activities, consult a tax professional for advice on whether the applicable income is subject to the NIIT.
Can I be subject to both taxes?
The NIIT and the Additional Medicare Tax are two separate taxes on two different categories of income. You may be subject to one or to both, depending upon you income levels in each category. If your wages, compensation, and self-employment income are above the threshold, you will owe the Additional Medicare Tax. If your MAGI is above the threshold and you have net investment income, then you will be subject to the NIIT. Consult a professional for advice on tax planning that can minimize your obligations under these new taxes.
Boelman Shaw Capital Partners is a comprehensive financial services company in Des Moines, Iowa. We provide our clients with tax planning, preparation, and IRS representation as well as an array of financial planning services. This unusual blend of services allows us to offer you a higher level of tax planning and investment advice that encompasses an understanding of your overall financial picture. Contact us to find out how we can help you develop smart tax and financial strategies for 2014.
Material discussed herewith is meant for general illustration and/or informational purposes only, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice.