Tax Tip of the Week | No. 237 | New Laws Affecting Your 2013 Tax Return - Part 1

Tax Tip of the Week | February 19, 2014 | No. 237 | New Laws Affecting Your 2013 Tax Return - Part 1Part 1 of 2:

Over a year ago in TTW#174, we provided an overview of the tax changes in the Patient Protection and Affordable Care Act (ObamaCare) which will impact your 2013 tax return. This is part one of a two part series that will take a look at three key changes in the tax code this year.Net Investment Income TaxThis new tax is also referred to as the 3.8% Medicare Surtax. This is a new “stand-alone” tax with its own set of rules.There are three critical terms you need to understand to determine if you are susceptible to this additional tax:-    Net Investment Income-    Threshold Amount-    Modified Adjusted Gross IncomeNet Investment Income includes:  interest, dividends, annuity distributions, rents, royalties, income derived from passive activities and capital gains from the sale of some types of property.Net Investment Income does NOT include:  salary, wages, bonuses, distributions from IRAs, income from self-employment, income from tax-exempt bonds and any gain from the sale of a primary residence.Threshold Amount is $200,000 for individuals, $250,000 for married couples and $11,950 for estates and trusts.Modified Adjusted Gross Income (MAGI) is essentially your regular AGI unless you had any foreign earned income exclusion.  In that case, the excluded foreign income would be added to your AGI to determine your MAGI.The Medicare Surtax is equal to the 3.8% multiplied by the LESSER of: 1) Net investment Income, or 2) the excess, if any, of the MAGI over the threshold amount.Example 1Joe is single.  His AGI for 2013 is $300,000 which includes $50,000 of dividend income, $40,000 from a partnership in which he did not materially participate and $210,000 in wages from his employer.  Joe had no foreign income exclusion.Modified Adjusted Gross Income               $300,000MAGI threshold for single individual        (200,000)Excess MAGI                                                        $100,000Dividend Income                     $50,000Passive Income                           40,000Investment Income                  90,000Lesser of excess MAGI OR investment income is $90,000.3.8% Tax X $90,000 = $3,420Example 2Same facts as Example 1 but Joe did not receive a $70,000 bonus that he anticipated, so that his wages were $140,000 instead of $210,000.MAGI                                        $230,000MAGI threshold                    (200,000)Excess MAGI                          $30,000Dividend Income                     50,000Passive Income                         40,000Investment Income                 90,000Lesser of excess MAGI OR investment income is $30,000.3.8% Tax X $30,000 = $1,140This new tax is calculated on a new Form 8960.Confused?  Just give us a call.

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Rick Prewitt - the guy behind TTW...until next week.