Posted By: CFP&WM On: Nov 6th, 2013 In: Financial planning Money Matters Taxes

Will the New Net Investment Income Tax Affect You in 2013?

The Net Investment Income Tax (NIIT) came about as a result of the government’s health care reform act. The NIIT assesses a 3.8% tax on specific net investment income and went into effect at the beginning of 2013. As the end of the year approaches, it is a good time to determine if you are impacted by this new tax.

The investments affected include: dividends, interest, distributions from non-qualified annuities, gains from the sale of equities, bonds or mutual funds, short and long-term capital gains, royalties, rental income, gains from the sale of investment property or income earned from businesses specifically involved in financial or commodities trading.

The income that is not impacted by the NIIT include: wages, Social Security benefits, unemployment compensation, self-employment income, alimony, distributions from certain qualified plans, etc. Individuals, trusts and estates, which have income levels above statutory thresholds, will be affected by NIIT.

For individuals with a Modified Adjusted Gross Income (MAGI) above a specific threshold, the NIIT becomes applicable.

 

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

There are several important considerations for individual investors:

  1. The NIIT is to be paid in addition to other income taxes.
  2. The threshold amounts specified are not indexed for inflation.
  3. The NIIT is not applicable to non-resident aliens, unless he or she is married to a citizen of the U.S. and files jointly, in which case different rules may apply and an investment advisor should be consulted.
  4. The NIIT may still affect tax liability for this year, even though investment income is not, in general, subject to withholding tax. For example, individual filers whose income falls below the $200,000 threshold still might be subject to the NIIT if their MAGI is pushed higher as a result of a financial windfall.
  5. Individuals who are exempt from Medicare taxes might also be subject to NIIT if his or her Net Investment Income and MAGI are above the applicable threshold.

There are also specific rules as regards to the sale of an individual tax filer’s principal residence. The NIIT will be applicable only to the taxable part of a gain from the sale of the principal dwelling, but only if the individual’s income exceeds the MAGI threshold.

Tax payers should also note that the NIIT is subject to estimated tax provisions, and those investors with expectations that they will be subject to NIIT in the future should make adjustments to withhold additional taxes now in order to avoid penalties as a result of underpayment of those taxes.

If your income is above the thresholds stated above, you should meet with your tax professional before the year-end and be certain of any impact from NIIT on your 2013 taxes and be sure that you have paid the appropriate estimated taxes.

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