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.