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Toll Free: 877.880.4477                       Phone: 281.880.6525 IRS Provides Guidance onNext Years Medicare Surtax      ...
» As Congress continues to argue about how to handle the approaching  "fiscal cliff," taxpayers should be aware that there...
» Apart from those potential increases, a new 3.8 percent "Net Investment  Income Tax" (also called the Medicare surtax) i...
To clear up confusion about the details of the new tax, the IRS just releasedguidance and some answers to frequently asked...
Q. Who is subject to the Net Investment Income Tax?A. Individuals will owe the tax if they have net investment income and ...
Q. What is included in net investment income?A. In general, investment income includes, but is not limited to: interest,  ...
Q. What kinds of gains are included in net investment income?A. To the extent that gains are not otherwise offset by capit...
Q. Can you provide some examples of how the Net Investment Income   Tax is calculated?A. Sure. Here are two examples to il...
Q. Does this tax apply to gain on the sale of a personal residence?A. It depends on the price of the residence, your incom...
Example 2: Brad and Connie are a married joint filing couple. They sell theirprincipal residence, which they have owned an...
Example 3: Diane, a single filer, earns $45,000 in wages and sells herprincipal residence for $1 million. She has owned an...
Q. Does net investment income include interest, dividends, and capital   gains of my children that I report on my tax retu...
Q. Is the Net Investment Income Tax subject to the estimated tax   provisions?A. Yes. The Net Investment Income Tax is sub...
Q. Will estates and trusts be subject to the Net Investment Income Tax?A. Estates and trusts will be subject to the tax if...
14550 Torrey Chase, Suite 100 Houston, TX 77014 USA             Toll Free : 877.880.4477             Phone : 281.880.6525 ...
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IRS Provides Guidance on Next Year's Medicare Surtax

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Transcript of "IRS Provides Guidance on Next Year's Medicare Surtax"

  1. 1. Toll Free: 877.880.4477 Phone: 281.880.6525 IRS Provides Guidance onNext Years Medicare Surtax www.hrp.net
  2. 2. » As Congress continues to argue about how to handle the approaching "fiscal cliff," taxpayers should be aware that there is a new tax taking effect next year that is not part of the tax breaks expiring at the end of this year.» Background: The "fiscal cliff" or "Taxmageddon" generally refers to a combination of upcoming spending cuts and tax breaks expiring on December 31, 2012. These tax breaks, which have been in place since 2003, include lower tax rates, lower dividend and capital gains rates, and more. If Congress does not act, these favorable tax rates expire and virtually all taxpayers will be affected. www.hrp.net
  3. 3. » Apart from those potential increases, a new 3.8 percent "Net Investment Income Tax" (also called the Medicare surtax) is scheduled to kick in on January 1, 2013. It is part of the healthcare law passed in 2010 (the Patient Protection and Affordable Care Act). It will only be imposed on certain high-income taxpayers.» Bottom line: Regardless of whether the expiring tax breaks are extended, the 3.8 percent Medicare surtax is likely to remain in place. www.hrp.net
  4. 4. To clear up confusion about the details of the new tax, the IRS just releasedguidance and some answers to frequently asked questions.Here are edited excerpts:Q. What is the Medicare surtax or Net Investment Income Tax?A. The Net Investment Income Tax is imposed under the Internal Revenue Code and applies at a rate of 3.8 percent to certain net investment income of individuals, estates, and trusts with income above certain amounts.Q. When does it take effect?A. The Net Investment Income Tax goes into effect on January 1, 2013. It will affect income tax returns of individuals, estates, and trusts for their first tax year beginning on (or after) January 1, 2013. It will not affect income tax returns for the 2012 taxable year that will be filed in 2013. www.hrp.net
  5. 5. Q. Who is subject to the Net Investment Income Tax?A. Individuals will owe the tax if they have net investment income and also have modified adjusted gross income over the following thresholds: Income Filing Status Threshold $200,000 Single or head of household $250,000 Married filing jointly $125,000 Married filing separately $200,000 Head of household (with qualifying person) $250,000 Qualifying widow(er) with dependent childNotes: These threshold amounts are not indexed for inflation. If you are exempt from Medicare taxes, you still may be subject to the Net Investment Income Tax if you have certain types of income and also have modified adjusted gross income over the applicable thresholds. www.hrp.net
  6. 6. Q. What is included in net investment income?A. In general, investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities, and businesses that are passive activities to the taxpayer (under IRC section 469). To calculate your net investment income, your investment income is reduced by certain expenses properly allocable to the income.Q. What are some common types of income that are not net investment income?A. Wages, unemployment compensation; operating income from a non- passive business, Social Security benefits, alimony, tax exempt interest, self employment income, Alaska Permanent Fund Dividends, and distributions from certain qualified plans. www.hrp.net
  7. 7. Q. What kinds of gains are included in net investment income?A. To the extent that gains are not otherwise offset by capital losses, the following gains are common examples of items taken into account in computing net investment income: • Gains from the sale of stocks, bonds, and mutual funds; • Capital gain distributions from mutual funds; • Gain from the sale of investment real estate (including gain from the sale of a second home that is not a primary residence); and • Gains from the sale of interests in partnerships and S corporations (to the extent you were a passive owner). www.hrp.net
  8. 8. Q. Can you provide some examples of how the Net Investment Income Tax is calculated?A. Sure. Here are two examples to illustrate how the tax is calculated: Example: Tom, a single filer, has wages of $180,000 and $15,000 of dividends and capital gains. His modified adjusted gross income is $195,000, which is less than the $200,000 statutory threshold for singles. Therefore, Tom is not subject to the Net Investment Income Tax. Example: Laura is a single filer with $180,000 of wages. She also received $90,000 from a passive partnership interest, which is considered net investment income. Lauras modified adjusted gross income is $270,000 ($180,000 plus $90,000. Her modified adjusted gross income exceeds the $200,000 threshold for single taxpayers by $70,000. Lauras net investment income is $90,000. The Net Investment Income Tax is based on the lesser of $70,000 (the amount that Lauras modified adjusted gross income exceeds the $200,000 threshold) or $90,000 (her net investment income). So Laura owes Net Investment Income Tax of $2,660 ($70,000 times 3.8 percent). www.hrp.net
  9. 9. Q. Does this tax apply to gain on the sale of a personal residence?A. It depends on the price of the residence, your income and other factors. The Net Investment Income Tax will not apply to any amount of gain that is excluded from gross income for regular income tax purposes. Current tax law exempts the first $250,000 for unmarried taxpayers ($500,000 for married joint filers) of gain recognized on the sale of a principal residence from gross income for regular income tax purposes. Thus, this amount is exempt from the Net Investment Income Tax. Example 1: Alan is single and earns $210,000 in wages. He sells his principal residence, which he has owned and resided in for the last 10 years, for $420,000. Alans cost basis in the home is $200,000 so his realized gain on the sale is $220,000. Under current tax law, he can exclude up to $250,000 of gain on the sale. Because this gain is excluded for regular income tax purposes, it is also excluded for purposes of determining net investment income. In this example, the Net Investment Income Tax does not apply to the gain from the sale of Alans home. www.hrp.net
  10. 10. Example 2: Brad and Connie are a married joint filing couple. They sell theirprincipal residence, which they have owned and resided in for the last 10years, for $1.3 million. The couples cost basis in the home is $700,000 sotheir realized gain on the sale is $600,000. The recognized gain subject toregular income taxes is $100,000 ($600,000 realized gain minus the$500,000 home sale exclusion for married joint filers). Brad and Conniehave $125,000 of other net investment income, which brings their total netinvestment income to $225,000. Their modified adjusted gross income is$300,000 and exceeds the threshold amount of $250,000 by $50,000.Results: The couple is subject to Net Investment Income Tax on the lesser of$225,000 (total net investment income) or $50,000 (the amount thecouples modified adjusted gross income exceeds the $250,000 marriedthreshold). Brad and Connie will owe Net Investment Income Tax of $1,900($50,000 times 3.8 percent). www.hrp.net
  11. 11. Example 3: Diane, a single filer, earns $45,000 in wages and sells herprincipal residence for $1 million. She has owned and resided in the placefor the last decade. Dianes cost basis in the home is $600,000 so herrealized gain on the sale is $400,000.The recognized gain subject to regular income tax is $150,000 ($400,000realized gain less the $250,000 home sale exclusion for singles), which isalso net investment income.Dianes modified adjusted gross income is $195,000. Since her modifiedadjusted gross income is below the single threshold amount of $200,000,Diane does not owe any Net Investment Income Tax. www.hrp.net
  12. 12. Q. Does net investment income include interest, dividends, and capital gains of my children that I report on my tax return?A. The amounts that are reported on your Form 1040 (on Form 8814, Parents Election to Report Childs Interest and Dividends) are included in calculating your net investment income. However, the calculation of your net investment income does not include amounts excluded from your Form 1040 due to the threshold amounts on Form 8814 and amounts attributable to Alaska Permanent Fund Dividends.Q. Will I have to pay both the 3.8 percent Net Investment Income Tax and the additional 0.9 percent Medicare tax?A. You may be subject to both taxes, but not on the same type of income. The 0.9 percent additional Medicare Tax applies to individuals wages, compensation, and self-employment income over certain thresholds, but it does not apply to income items included in net investment income. www.hrp.net
  13. 13. Q. Is the Net Investment Income Tax subject to the estimated tax provisions?A. Yes. The Net Investment Income Tax is subject to the estimated tax provisions. Individuals, estates, and trusts that expect to be subject to the tax in 2013 or thereafter should adjust their income tax withholding or estimated payments to account for the tax increase in order to avoid underpayment penalties.Q. Does the tax have to be withheld from wages?A. No, but employees can request that additional income tax be withheld from their wages.Q. Are there taxpayers who are not subject to the Net Investment Income Tax regardless of income?A. Nonresident aliens are not subject to the tax. www.hrp.net
  14. 14. Q. Will estates and trusts be subject to the Net Investment Income Tax?A. Estates and trusts will be 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). There are special computational rules for certain unique types of trusts, such charitable remainder trusts and electing small business trusts. These answers provide some clarity to questions that many taxpayers have about the new Net Investment Income Tax (or Medicare surtax). Still have questions about your situation? Consult with your tax adviser. www.hrp.net
  15. 15. 14550 Torrey Chase, Suite 100 Houston, TX 77014 USA Toll Free : 877.880.4477 Phone : 281.880.6525 Fax : 281.866.9426 E-mail : info@hrp.net www.hrp.net
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