The New Rules on Taxes for Investment Income


The Internal Revenue Service (IRS) has released a new set of rules for the taxes on investment income. These rules are geared towards capital gains as well as dividends that were earned by high-earners, or those individuals who have income that’s “higher than the average”. The rules were passed to the Congress and were also included on the Healthcare Reform Law of 2010.

Read on to know the changes on the rules on taxes for investment income.

Surtax will Be Applied on Healthcare

The 3.8% investment income tax that will be applied on investment income is meant to pay for the healthcare and this took effect last January 1st 2013. This is the first ever surtax that will be applied on capital gains as well as on dividend income.

To Whom will the Tax Be Applied?

The 3.8% surtax is also called the Medicare tax and the health care surtax. This applies to tax years that ended last Dec. 31, 2012. The surtax is for the following:

• For individuals, the 3.8% will be applied to those who are earning more than $200,000 based on modified adjusted gross income or MAGI.
• For estates and trusts, the 3.8% will be applied on the net investment income that were undistributed for the year and if there are any excess on the modified adjusted gross income.
• For married couples, the 3.8% will be applied to those who are filing jointly and have more than $250,000 of combined modified gross income.

What is Investment Income?

The taxes on investment income will be applied to various investment securities, like bonds and stocks, including commodity securities as well as those specialized derivatives. The rules will spell out if the tax is applied to annuities and trusts, including individuals who are into securities trading. This new set of rules will include a 0.90 percent healthcare tax that will be applied on wages for individuals that are earning “higher than the average”.

Effectivity of the Rules

The proposed rules took effect last January 1. Before the rules were made final, the Internal Revenue Service has opened up to any public comments and even held hearings last April and has made campaigns to make the public be aware of what investment income is. Altogether, the taxes are expected to raise $317.7 billion in more than ten years. This was according to the analysis done by the Joint Committee on Taxation that was released last June.

Illustration on the Application of Tax

In order to illustrate the investment income tax and to better understand what investment income is, the Internal Revenue Service used the example of an individual taxpayer that is earning $180,000 in wages as well as $90,000 on investment income. This person’s modified gross income (MAGI) is at $270,000. Based on this, the 3.8% tax will be applied only on $70,000 and the person will have to pay a total of $2,660 on taxes. Because of these changes on the rules, the Internal Revenue Service has released new forms for the tax payers to fill out this 2013 tax filing.

Several tax experts who have earned their llm in taxation have agreed that this new set of rules for the investment income tax still has some questions that were left unanswered. It is still not clear as to how the rental income would be treated under these new rules, according to Michael Grace, the managing director of Milbank, Tweed, Hadley and McCloy LLP law firm that’s based in Washington and was a former Internal Revenue Service official himself. He added that these new proposed regulations for taxes on investment income will just add on the tax burdens of individual tax payers and he believes that there should be some drafting that needs to be done.

What do you think readers? Will this new surtax significantly hurt your ROI? Lets hear your frustration in the comments!