Effective for 2013, taxpayers may be subject to a new 3.8 percent surtax on net investment income. The surtax will apply to those taxpayers whose income is over a “threshold amount” called Modified Adjusted Gross Income (MAGI). For single taxpayers, MAGI is $200,000; for other taxpayers, MAGI is $250,000. Income subject to the surtax includes taxable interest income, dividend income, rental income, royalties, annuities, capital gains from the sale of investment assets, and income from businesses where the taxpayer is not active in the business.
Income not subject to this surtax includes salary and wages, income subject to self-employment income, business income where the taxpayer is active in the business, pensions, social security income, and distributions from IRAs and other qualified plans.
Elizabeth, a single taxpayer, has $170,000 of investment income and received a $65,000 required minimum distribution (RMD) from his traditional IRA in 2013. The RMD is not “net investment income,” but it is included in MAGI, increasing MAGI to $235,000. The surtax applies to the lesser of: 1) net investment income (i.e., $170,000) or 2) the excess of MAGI over the $200,000 threshold amount for single taxpayers (i.e.,$235,000 minus $200,000 or $35,000). Thus, $35,000 is subject to the surtax and the amount payable is $1,330 (.038 x $35,000).
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