Were you surprised when you got hit with the new Net Investment Income Tax in 2013? Well, it's here again.
The Net Investment Income Tax imposes a 3.8% tax on investment income if your modified adjusted income is above $200,000 for individuals and $250,000 for married filing jointly.
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. To calculate your Net Investment Income, your investment income is reduced by certain expenses properly allocable to the income.
The types of activities that generate Investment income include:
- 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).
- Gains from the sale of interests in partnerships and S corporations (to the extent you are a passive owner).
There are some strategies to reduce Investment Income. For example you may consider gifting appreciable stock that has been held over one year to charity instead of selling the stock and gifting cash. This way you avoid the capital gain on the sale. Another year-end strategy is called "loss harvesting." Loss Harvesting is selling securities at a loss to offset a capital gains tax liability. Losses offset gains dollar for dollar. Contact your financial adviser to see if this makes sense for you.
If you were hit with the Net Investment Income Tax, you were probably also hit with the Additional Medicare Tax. This tax is an additional .9% tax for individuals with earned income over $125,000 and $250,000 if married filing jointly.
To avoid owing more tax, you should change your tax withholdings at work or make additional estimated tax payments. If you are concerned that you have not paid-in enough tax for 2014, contact our office for a tax analysis.