Are you prepared for the NIIT?

[mwcpa]

The new Net Investment Income Tax ("NIIT") is here....

This tax, which is 3.8%, is on top of your income tax.

If you earn more than $200,000 a year ($250,000 for a couple, $125,000 if married filing separate) you will incur this tax. 

Investment income includes, long and short term capital gain, interest income, dividends, profits from passive activities (like rental real estate) and others. 

I have many clients who were not aware of this tax until I brought it up with them.  This tax is charged on net investment income that is in excess of the income thresholds noted above.  If you have a salary of $200,000 and interest income of $1,000 (as a single person) you will pay an extra $38 in tax.  While it may not seem to be a lot, that one time capital gain of $100,000 is $3,800.  And, not to mention that the 15% capital gains rate can become 20%.... ordinary income tax rate can become 39.6%.... ouch!

It makes sense to discuss this matter with your tax professional, there are things you can do between now and December 31st to minimize the impact of this tax.  Many who have gotten used to AMT will not be shocked by NIIT.

For we tax professionals out there, now we have a "third" tax to compute for clients.... "regular" tax, AMT, and not NIIT (plus 0.9% the Medicare surcharge, so it is really four). 

This is a tough sell to clients, telling them Congress made tax filings more difficult and now you need to pay me more to work the magic, lot's of balking at the extra time I need to spend as a result of Congress tinkering again with the tax law.... I guess they can always go to the box.... 

[wodehouse]

This is the 3.8% that's related to Medicare, right?

[Deleted]

this is the additional taxes some of us have to pay to help defray the cost of the new healthplan

[wodehouse]

To answer my own question, yes, it is, (in a way).

www.irs.gov/Businesses/Small-Businesses-%26-Self-Employed/Questions-and-Answers-for-the-Additional-Medicare-Tax

links to

www.irs.gov/uac/Newsroom/Net-Investment-Income-Tax-FAQs

[wodehouse]

Dec 13, 2013 14:27:28 GMT -5 @gdgyva said:

this is the additional taxes some of us have to pay to help defray the cost of the new healthplan

In addition to lower benefits for Flexible Spending plans for healthcare

[Deleted]

I would love to have that problem.

[wodehouse]

Reading about the NIIT, this doesn't seem to be applied if the modified AGI is not above the threshold income, regardless of what the investment income is. Is this correct?

It's not how I originally understood this but this seems to be what the IRS FAQ tells me:

Individuals will owe the tax if they have Net Investment Income and also have modified adjusted gross income over the following thresholds...

...NOT a tax professional!

[vonna]

There is also a change in itemized deductions for medical expenses that kicked in for 2013.  This is also part of the affordable care act, and will affect a much different demographic than the NIIT.

Beginning Jan. 1, 2013, you can claim deductions for medical expenses not covered by your health insurance that exceed 10 percent of your adjusted gross income. (up from 7.5%)

This new tax rule is grandfathered for those 65 years or older until 2016, but it will impact a lot of taxpayers who have high medical expenses in relation to their income.

I am a volunteer taxpayer, and I can think of at least three of my clients that will be negatively affected by this. 

I did warn them last year when I did their taxes, but a warning won't take the sting away.

[mwcpa]

there were many changes in the tax law this year.... some related to the PPACA and others related to the Congressional impasse over the last too many years that came to a head with the shut down this year and the 2012 tax changes passed in January 2013.

Many are getting stings.... even those who are not subject to the NIIT or the other PPACA tax law changes.

[Bonny]

MWCPA,

Could you define your use of the word "income"? Does this only affect those who have high earned or ordinary income or would it affect someone who sold a house with a large capital gain?

[mwcpa]

For "niit" income is known as modified adjusted gross income (magi).  For most people this is your adjusted gross income.

if magi is over 200,000 (single person)/ 250,000 (married filing joint) then the tax comes into play.

if one sells a home and the sale qualifies for the home sale exclusion then the excluded amount is not subject to niit.

[TheOtherMe]

I am getting hit the by 10% of AGI reduction for medical expenses.  I didn't have big medical bills this year.  They exceeded 7.5%, but not 10%.

[Bonny]

Dec 16, 2013 7:01:58 GMT -5 mwcpa said:

For "niit" income is known as modified adjusted gross income (magi).  For most people this is your adjusted gross income.

if magi is over 200,000 (single person)/ 250,000 (married filing joint) then the tax comes into play.

if one sells a home and the sale qualifies for the home sale exclusion then the excluded amount is not subject to niit.

But when we sell a rental house with capital gains we would, right?

[mwcpa]

"But when we sell a rental house with capital gains we would, right?"

This capital gain, like other capital gains can be subject to the net investment income tax.... your MAGI needs to exceed the thresholds noted (200K single, 250K married filing joint, 125K married filing separate)

[Bonny]

Dec 17, 2013 21:22:56 GMT -5 mwcpa said:

"But when we sell a rental house with capital gains we would, right?"

This capital gain, like other capital gains can be subject to the net investment income tax.... your MAGI needs to exceed the thresholds noted (200K single, 250K married filing joint, 125K married filing separate)

Thank MWCPA, that's what I thought.