Tag Archives: capital gains tax

Net Investment Income Tax

Net Investment Income Tax

High-income taxpayers could see their tax burdens rise beginning in 2013 due to the Net Investment Income Tax.  Here are some possible explanations:

Increased top marginal tax rate.  For 2013, the highest marginal tax rate increased back to 39.6%.  This applies to taxable income above $400,000 (single filers) and above $450,000 (joint filers).   That’s up from 35%.  The taxable income level at which the 39.6% rate kicks in is indexed to inflation in future years.

Higher rate on investment income.  The tax rate on long-term capital gains and qualified dividends increase to 20% for taxpayers in the top bracket.  Most other taxpayers pay 15% tax rate on this investment income.

Phase out of itemized deductions.  Higher-income taxpayers also face a potential phase out of itemized deductions and personal exemptions as their adjusted gross income (AGI) rises above $250,000 for singles or $300,000 for married couples.

Medicare surtax on net investment income.  Under the Affordable Care Act, this 3.8% tax on net investment income kicks in when a taxpayer’s modified AGI exceeds certain threshholds.  The 3.8% surtax applies to the net investment income of singles when modified adjusted gross income exceeds $200,000 and to the net investment income of married couples when modified adjusted gross income exceeds $250,000 if filing jointly (applies to married couples filing separately who individually earn more than $125,000).  Investment income includes interest, dividends, royalties, rents, capital gains and passive activity income.

Additional Medicare tax of 0.9%  Additional Medicare tax of 0.9% on income from wages and self-employment for single taxpayers earning more than $200,000 and joint taxpayers earning more than $250,000.

 

How to Reduce Income Taxes on Mutual Funds

In order to reduce federal income taxes on your mutual funds, avoid buying mutual funds near the distribution date, buy index funds which typically have little to no capital gains or dividend distributions, buy a tax-managed mutual funds, or harvest other capital losses to offset your capital gains (If you have more capital losses than gains, you can deduct up to $3,000 of those capital losses from your earned income.  And if you still have losses left over, you can carry those over into the next tax year).   The full range of strategies to minimize your taxes on investment gains is explained in this article:

http://www.usatoday.com/story/money/columnist/waggoner/2013/10/31/the-horror-of-mutual-fund-taxes/3327981/