Don’t Fall for New Tax Scam Tricks by IRS Posers

copied and posted directly from the IRS Summertime Tax Tip 2015

Don’t Fall for New Tax Scam Tricks by IRS Posers

Though the tax season is over, tax scammers work year-round. The IRS advises you to stay alert to protect yourself against new ways criminals pose as the IRS to trick you out of your money or personal information. These scams first tried to sting older Americans, newly arrived immigrants and those who speak English as a second language. The crooks have expanded their net, and now try to swindle virtually anyone. Here are several tips from the IRS to help you avoid being a victim of these scams:

  • Scams use scare tactics.  These aggressive and sophisticated scams try to scare people into making a false tax payment that ends up with the criminal. Many phone scams use threats to try to intimidate you so you will pay them your money. They often threaten arrest or deportation, or that they will revoke your license if you don’t pay. They may also leave “urgent” callback requests, sometimes through “robo-calls,” via phone or email. The emails will often contain a fake IRS document with a phone number or an email address for you to reply.
  • Scams use caller ID spoofing.  Scammers often alter caller ID to make it look like the IRS or another agency is calling. The callers use IRS titles and fake badge numbers to appear legit. They may use online resources to get your name, address and other details about your life to make the call sound official.
  • Scams use phishing email and regular mail.  Scammers copy official IRS letterhead to use in email or regular mail they send to victims. In another new variation, schemers provide an actual IRS address where they tell the victim to mail a receipt for the payment they make. All in an attempt to make the scheme look official.
  • Scams cost victims over $20 million.  The Treasury Inspector General for Tax Administration, or TIGTA, has received reports of about 600,000 contacts since October 2013. TIGTA is also aware of nearly 4,000 victims who have collectively reported over $20 million in financial losses as a result of tax scams.

The real IRS will not:

  • Call you to demand immediate payment. The IRS will not call you if you owe taxes without first sending you a bill in the mail.
  • Demand that you pay taxes and not allow you to question or appeal the amount that you owe.
  • Require that you pay your taxes a certain way. For instance, require that you pay with a prepaid debit card.
  • Ask for credit or debit card numbers over the phone.
  • Threaten to bring in police or other agencies to arrest you for not paying.

If you don’t owe taxes or have no reason to think that you do:

  • Do not provide any information to the caller. Hang up immediately.
  • Contact the Treasury Inspector General for Tax Administration. Use TIGTA’s “IRS Impersonation Scam Reporting” web page to report the incident.
  • You should also report it to the Federal Trade Commission. Use the “FTC      Complaint Assistant” on Please add “IRS Telephone Scam” in the notes.

If you know you owe, or think you may owe taxes:

  • Call the IRS at 800-829-1040. IRS workers can help you if you do owe taxes.

Stay alert to scams that use the IRS as a lure. For more, visit “Tax Scams and Consumer Alerts” on

IRS YouTube Videos:

IRS Podcasts:

Notify the Marketplace If You Have Changes in Circumstances

Report Changes in Circumstances that could Affect Your 2015 Premium Tax Credit

If you have enrolled for health coverage through the Health Insurance Marketplace and receive advance payments of the premium tax credit in 2015, it is important that you report changes in circumstances, such as changes in your income or family size, to your Marketplace.

For the full list of changes you should report, visit

Advance payments of the premium tax credit provide financial assistance to help you pay for the insurance you buy through the Marketplace. Having at least some of your credit paid in advance directly to your insurance company will reduce the out-of-pocket cost of the health insurance premiums you’ll pay each month.

However, it is important to notify the Marketplace about changes in circumstances to allow the Marketplace to adjust your advance payment amount. This adjustment will decrease the likelihood of a significant difference between your advance credit payments and your actual premium tax credit. Changes in circumstances that you should report to the Marketplace include, but are not limited to:

  • An increase or decrease in your income
  • Marriage or divorce
  • The birth or adoption of a child
  • Starting a job with health insurance
  • Gaining or losing your eligibility for other health      care coverage
  • Changing your residence

If you report changes in your income or family size to the Marketplace when they happen in 2015, the advance payments will more closely match the credit amount on your 2015 federal tax return.  This will help you avoid getting a smaller refund than you expected, or even owing money that you did not expect to owe.

There is still time – Last-Minute Tax Tips

Last-Minute Tax Tips

It’s that time of year again–tax filing season. And while many taxpayers like to get a head start on filing their returns, there are those of us who always find ourselves scrambling at the last minute to get our tax returns filed on time. Fortunately, even for us procrastinators, there is still time to take advantage of some last-minute tax tips.

If you need more time, get an extension

Failing to file your federal tax return on time could result in a failure-to-file penalty. If you don’t think you’ll be able to file your tax return on time, you can file for and obtain an automatic six-month extension by using IRS Form 4868. You must file for an extension by the original due date for your return. Individuals whose due date is April 15 would then have until October 15 to file their returns.

In most cases, this six-month extension is an extension to file your tax return and not an extension to pay any federal income tax that is due. You should estimate and pay any federal income tax that is due by the original due date of the return without regard to the extension, since any taxes that are not paid by the regular due date will be subject to interest and possibly penalties.

Try to lower your tax bill

While most tax-saving strategies require action prior to the end of the tax year, it’s still not too late to try to lower your tax bill by making deductible contributions to a traditional IRA and/or pre-tax contributions to an existing qualified Health Savings Account (HSA). If you’re eligible, you can make contributions to these tax-saving vehicles at any time before your tax return becomes due, not including extensions (for most individuals, by April 15 of the year following the year for which contributions are being made).

For tax year 2014, you may be eligible to contribute up to $5,500 to a traditional IRA as long as you’re under age 70½ and have earned income. In addition, if you’re age 50 or older, you may be able to make an extra “catch-up” contribution of $1,000. You can make deductible contributions to a traditional IRA if neither you nor your spouse is covered by an employer retirement plan; however, if one of you is covered by an employer plan, eligibility to deduct contributions phases out at higher modified adjusted gross income limits. For existing qualified HSAs, you can contribute up to $3,300 for individual coverage or $6,550 for family coverage.

Use your tax refund wisely

It’s easy to get excited at tax time when you find out you’ll be getting a refund from the IRS–especially if it’s a large sum of money. But instead of purchasing that 60-inch LCD television you’ve had your eye on, you may want to use your tax refund in a more practical way. Consider the following options:

  • Deposit your refund into a tax-savings vehicle (if you’re eligible), such as a retirement or education savings plan–the IRS even allows direct deposit of refunds into certain types of accounts, such as IRAs and Coverdell education savings accounts.
  • Use your refund to pay down any existing debt you may have, especially if it is in the form of credit-card balances that carry high interest rates.
  • Put your refund toward increasing your cash reserve–it’s a good idea to always have at least three to six months worth of living expenses available in case of an emergency.

Finally, a tax refund is essentially an interest-free loan from you to the IRS. If you find that you always end up receiving a large income tax refund, it may be time to adjust your withholding.

Beware of possible tax scams

Though tax scams can occur throughout the year, they are especially prevalent during tax season. Some of the more common scams include:

  • Identity thieves who use your identity to fraudulently file a tax return and claim a refund.
  • Callers who claim they’re from the IRS insisting that you owe money to the IRS or that you’re entitled to a large refund.
  • Unsolicited e-mails or fake websites, often referred to as “phishing,” that pose as legitimate IRS sites to convince you to disclose personal or financial information.
  • Scam artists who pose as tax preparers and promise unreasonably large or inflated refunds in order to commit refund fraud or identity theft.

The IRS will never call you about taxes owed without sending you a bill in the mail. If you think you may owe taxes, contact the IRS directly at In addition, the IRS will never initiate contact with you by e-mail to request personal or financial information. If you believe that you’ve been the victim of a tax scam, or would like to report a tax scammer, contact the Treasury Inspector General for Tax Administration at



2014 Standard Deduction Amounts

There are 2 main types of tax deductions: the standard deduction and itemized deductions. The standard deduction, which is subtracted from your AGI, reduces your taxable income and usually changes each year to reflect inflation.

     Filing Status                           Standard Deduction

  1. Single                                   $  6,200
  2. Married Filing Jointly            $12,400
  3. Married Filing Separately     $  6,200
  4. Head of Household              $  9,100

The additional standard deduction for people who have reached age 65 (or who are blind) is $1,200 for married taxpayers or $1,550 for unmarried taxpayers.

 2014 Personal Exemption Amount and Phaseout

The personal exemption amount for 2014 is increased to $3,950.

The personal exemption is subject to a phaseout. Specifically, the total personal exemptions to which you’re entitled will begin to be reduced  as your adjusted gross income (that is, the bottom line of the first page of your Form 1040) exceeds a certain threshold amount (adjusted for inflation for 2014):

  • $254,200 for single taxpayers,
  • $305,050 for married taxpayers filing jointly,
  • $279,650 for taxpayers filing as head of household, and
  • $152,525 for married taxpayers filing separately.

“Pease” Limitation on Itemized Deductions

The amount of itemized deductions which you are allowed to claim is reduced by 3% of the amount by which your adjusted gross income exceeds certain threshold amounts. These threshold amounts are the same as the threshold amounts listed above for the personal exemption phaseout. However there are two important exceptions to this rule:

  1. Your itemized deductions cannot be reduced by more than 80% as a result of this limitation, and
  2. Your itemized deductions for medical expenses, investment interest expense, casualty/theft losses, and gambling losses are not reduced as a result of this limitation.

Non-Changes to Taxes on Investment Income

Because of the permanent changes implemented by the American Taxpayer Relief Act of 2012, qualified dividends and long-term capital gains will be subject to the same 0%, 15%, and 20% tax rates as last year, depending on which tax bracket the income falls into.

In addition, the 3.8% tax on net investment income is unchanged, because the threshold amounts (adjusted gross income of $200,000 if single or $250,000 if married filing jointly) are not indexed for inflation.

AMT Exemption Amount

The exemption amount for the Alternative Minimum Tax is now permanently indexed to inflation. The following are the AMT exemptions for 2014:

  • $52,800 for single taxpayers,
  • $82,100 for married taxpayers filing jointly, and
  • $41,050 for married taxpayers filing separately.

IRA and 401(k) Contribution Limits

For 2014, most retirement account contribution limits remain unchanged:

  • $5,500 for Roth and traditional IRAs, with an additional catch-up contribution of $1,000 for people age 50 or older, and
  • $17,500 for 401(k), 403(b), and most 457 plans, with an additional catch-up contribution of $5,500 for people age 50 or older.

The maximum possible contribution for defined contribution plans (e.g., for a self-employed person with a sufficiently high income contributing to a SEP IRA) is increased from $51,000 to $52,000.

Salary reduction contributions (SIMPLE IRA)

The amount the employee contributes to a SIMPLE IRA cannot exceed $12,000 in 2014 and $12,500 in 2015.

If an employee participates in any other employer plan during the year and has elective salary reductions under those plans, the total amount of the salary reduction contributions that an employee can make to all the plans he or she participates in is limited to $17,500 in 2014 and $18,000 in 2015.

  • Catch-up contributions. If permitted by the SIMPLE IRA plan, participants who are age 50 or over at the end of the calendar year can also make catch-up contributions. The catch-up contribution limit for SIMPLE IRA plans is $2,500 in 2014 and $3,000 in 2015.


Tax Season to Open on January 20th

Tax Season to Open on January 20th   

WASHINGTON — Following the passage of the extenders legislation, the Internal Revenue Service announced today it anticipates opening the 2015 filing season as scheduled in January.

The IRS will begin accepting tax returns electronically on Jan. 20. Paper tax returns will begin processing at the same time.

The decision follows Congress renewing a number of “extender” provisions of the tax law that expired at the end of 2013. These provisions were renewed by Congress through the end of 2014. The final legislation was signed into law Dec 19, 2014.

We have reviewed the late tax law changes and determined there was nothing preventing us from continuing our updating and testing of our systems,” said IRS Commissioner John Koskinen. “Our employees will continue an aggressive schedule of testing and preparation of our systems during the next month to complete the final stages needed for the 2015 tax season.”

The IRS reminds taxpayers that filing electronically is the most accurate way to file a tax return and the fastest way to get a refund. There is no advantage to people filing tax returns on paper in early January instead of waiting for e-file to begin.

More information about IRS Free File and other information about the 2015 filing season will be available in January.

College Financial Aid Forms – When and Where

When do I need to submit college financial aid forms?

It depends on the form you’re filling out and whether your child is a new college student or a returning student.

College deadlines for the federal government’s financial aid form, the FAFSA, might be anywhere from February 1 to April 1 for both new and returning students. But it’s in your best interest to submit the FAFSA as soon after January 1 as possible (it can’t be submitted before January 1) because some government aid programs operate on a first-come, first-served basis.

The FAFSA relies on tax information from the previous year, so it’s helpful to have your tax return already completed.  However, if you don’t, you can still file the FAFSA using estimated numbers and then go back later and update your FAFSA with final tax numbers once you’ve completed your tax return (the government offers an online  tool–the IRS Data Retrieval Tool–that allows you to import your  tax information directly into your FAFSA). The FAFSA captures two data points: the financial picture of  both the parent(s) and the student for the previous year.

The main financial aid form that most colleges use to distribute their own aid, the CSS Profile, is due anywhere from February 1 to March 1 for new students applying to college regular decision (or November 1 to December 1 for new students applying early decision or early action) and by April 15 for returning students. The CSS Profile captures six data points: the financial picture of both the parent(s) and student for the previous year, and an estimated financial picture of parent(s) and student for the current year and for the following year.

Even if you don’t think your child will qualify for need-based federal financial aid, you should consider submitting the FAFSA if: (1)  you want your child to be eligible for an unsubsidized Stafford Loan (a non-need-based federal student loan available to any student); and/or (2) you want your child to be considered for college need-based aid–colleges  generally require both  the FAFSA and the CSS Profile before they will consider your child for college need-based aid.

Both the FAFSA and the CSS Profile can be submitted online … click here:, and you must file them for each year that you want your child to be considered for aid.

Save for Retirement – Saver’s Credit

Plan Now to Get Full Benefit of Saver’s Credit; Tax Credit Helps Low- and Moderate-Income Workers Save for Retirement

WASHINGTON — Low- and moderate-income workers can take steps now to save for retirement and earn a special tax credit in 2014 and years ahead, according to the Internal Revenue Service.

The saver’s credit helps offset part of the first $2,000 workers voluntarily contribute to IRAs and 401(k) plans and similar workplace retirement programs. Also known as the retirement savings contributions credit, the saver’s credit is available in addition to any other tax savings that apply.

Eligible workers still have time to make qualifying retirement contributions and get the saver’s credit on their 2014 tax return. People have until April 15, 2015, to set up a new individual retirement arrangement or add money to an existing IRA for 2014. However, elective deferrals (contributions) must be made by the end of the year to a 401(k) plan or similar workplace program, such as a 403(b) plan for employees of public schools and certain tax-exempt organizations, a governmental 457 plan for state or local government employees, or the Thrift Savings Plan for federal employees. Employees who are unable to set aside money for this year may want to schedule their 2015 contributions soon so their employer can begin withholding them in January.

The saver’s credit can be claimed by:

  • Married couples filing jointly with incomes up to $60,000 in 2014 or $61,000 in 2015;
  • Heads of Household with incomes up to $45,000 in 2014 or $45,750 in 2015; and
  • Married individuals filing separately and singles with incomes up to $30,000 in 2014 or $30,500 in 2015.

Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed. Though the maximum saver’s credit is $1,000, $2,000 for married couples, the IRS cautioned that it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers.

A taxpayer’s credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs. Form 8880 is used to claim the saver’s credit, and its instructions have details on figuring the credit correctly.

In tax year 2012, the most recent year for which complete figures are available, saver’s credits totaling $1.2 billion were claimed on more than 6.9 million individual income tax returns. Saver’s credits claimed on these returns averaged $215 for joint filers, $165 for heads of household and $127 for single filers.

The saver’s credit supplements other tax benefits available to people who set money aside for retirement. For example, most workers may deduct their contributions to a traditional IRA. Though Roth IRA contributions are not deductible, qualifying withdrawals, usually after retirement, are tax-free. Normally, contributions to 401(k) and similar workplace plans are not taxed until withdrawn.

Other special rules that apply to the saver’s credit include the following:

  • Eligible taxpayers must be at least 18 years of age.
  • Anyone claimed as a dependent on someone else’s return cannot take the credit.
  • A student cannot take the credit. A person enrolled as a full-time student during any part of 5 calendar months during the year is considered a student.

Certain retirement plan distributions reduce the contribution amount used to figure the credit. For 2014, this rule applies to distributions received after 2011 and before the due date, including extensions, of the 2014 return. Form 8880 and its instructions have details on making this computation.

Begun in 2002 as a temporary provision, the saver’s credit was made a permanent part of the tax code in legislation enacted in 2006. To help preserve the value of the credit, income limits are now adjusted annually to keep pace with inflation. More information about the credit is on

Cheat Sheet to Tax Changes for 2014

Cheat Sheet to Tax Changes for 2014

The good news is that most people don’t need to worry about most parts of the tax code. Here’s a guide to some of the major changes (and non-changes) for 2014 that will impact almost every filer.

Income tax brackets

There’s a certain alchemy to taxes, but really, the biggest hit that most individuals receive is from the personal income tax. This is also where the government makes most of its money, collecting about 60 percent of total revenue from the personal income tax. Since it’s probably your biggest tax liability, it’s worth knowing which tax bracket you fall into. Remember that 2013 saw the addition of a new top tax bracket, which is sticking around for the foreseeable future.

Income tax brackets have once again changed — and, for the most part, for the better. The caps for each bracket have been raised so it’s possible, if your income doesn’t increase significantly, that when you file your fiscal 2014 taxes, you’ll fall into a lower bracket than when you filed in 2013.

Tax Bracket Single Married Filing Jointly   Head ofHousehold Married Filing Separately
10% $0 to$9,075 $0 to$18,150 $0 to$12,950 $0 to$9,075
15% $9,076 to$36,900 $18,151 to$73,800  $12,951   to$49,400 $9,076 to$36,900
25% $36,901 to$89,350 $73,801 to$148,850 $49,401 to$127,550 $36,901 to$74,425
28% $89,351 to$186,350 $148,851 to$226,850 $127,551 to$206,600 $74,426 to$113,425
33% $186,351 to $405,100 $226,851 to$405,100 $206,601 to$405,100 $113,426 to$202,550
35% $405,101 to $406,750 $405,101 to $$457,600 $405,101 to$432,200 $202,551 to$228,800
39.6% $406,751 ormore $457,601 ormore $432,201ormore $228,801 ormore


Personal exemptions, standard deductions, and itemized deductions

The tax code may be packed full of unfair exemptions and loopholes for certain businesses and the super wealthy, but the average Joe has at least one thing going for him: the personal exemption. The personal exemption acts like a tax deduction, meaning it reduces your total taxable income. It is regularly adjusted upwards, and 2014 is no exception. The personal exemption increased by $50, from $3,900 in 2013 to $3,950 in 2014.

Remember that the personal exemption now has a phase out (and also remember that you can’t file for a personal exemption if someone claims you as a dependent.) Your personal exemption will be reduced by 2 percent of the amount of income you earn that exceeds the amount listed here:

  • $250,200 for single taxpayers
  • $305,050 for married taxpayers filing jointly
  • $279,650 for taxpayers filing as head of household
  • $152,525 for married taxpayers filing separately

Itemized deductions are also subject to a phaseout rule similar to the personal exemption phaseout rule, except the reduction is 3 percent of the amount of income you earn that exceeds the threshold (same as above), or 80 percent, whichever is lower. However, there are three big exceptions to be aware of: deductions claimed for medical expenses, investment interest, or for casualty or theft losses are unaffected.

The 2014 standard deduction amounts are listed below.

  • Single: $6,200
  • Head of Household: $9,100
  • Married Filing Jointly: $12,400
  • Married Filing Separately: $6,200
  • Qualifying Widow/Widower: $12,400

For dependents, the standard deduction is a little more complicated. Dependents can deduct whichever is greater: $1,000, or earned income plus $350, but not in excess of $6,200 (the standard deduction for a single filer)

Those who are aged 65 years or older and those who are legally blind can increase their standard deduction by $1,550 if they are filing as a single or as a head of household, and by $1,200 if they are married filing jointly, separately, or a qualifying widow.

Retirement account contribution limits

Not a lot about retirement account contribution limits has changed between 2013 and 2014 (knock on wood), but it’s these limits are some of the most important pieces of tax-related information you can know. For the record, contribution limits are indexed to inflation, but, as the IRS put it, “Some pension limitations such as those governing 401(k) plans and IRAs will remain unchanged because the increase in the Consumer Price Index did not meet the statutory thresholds for their adjustment.”

The contribution limit for Roth and traditional IRAs is unchanged at $5,500, with a catch-up contribution allowance of $1,000 for those aged 50 or more. The contribution limit 401(k)s is also unchanged at $17,500, with a catch-up contribution allowance of $5,500 for those aged 50 or more.

Remember, if your employer sponsors a retirement plan, then the deductions you can claim for contributions to a traditional IRA begin to phase out at a certain income level (the IRS can tell you exactly what the phaseout range is.) Contributions to a Roth IRA also phase out at certain income levels, regardless of workplace plans.

Finally, the income limit for the savers credit was bumped up to $60,000 for married couples filing jointly, $45,000 for heads of households, and $30,000 for married people filing separately or single filers.

Alternative minimum tax

Think you can deduct your way to a tax-free 2014? Well, think again. The introduction of the alternative minimum tax made it (theoretically) impossible for wealthier Americans to game the tax system and totally eliminate their tax liability through the abuse of deductions. To make a long story short, if you earn less than the following amounts by filing status, you don’t need to worry.

  • $52,800 for single taxpayers
  • $82,100 for married taxpayers filing jointly
  • $41,050 for married taxpayers filing separately
  • If you earn more than this, or if you’ve claimed any of about two-dozen specific deductions (find out which ones at the IRS website), you need to fill out the dreaded form 6251. This form calculates income tax differently than normal, primarily through the exclusion of certain deductions. If you end up owing more in income tax through form 6251 than you do through the normal calculation, then you must pay the difference as an additional tax.
  • Those of you who are married with children should definitely make sure to check whether or not the AMT applies to you. The AMT does not allow for personal exemptions, meaning you can’t deduct your children (or yourselves.)

If you itemize your deductions, those of you with a large medical bill should be aware that if you want to claim a medical expense deduction, it has to exceed an additional 2.5 percent of your adjusted gross income under the AMT. Normally, you can only deduct the part of your medical and dental expenses that exceed 10 percent of your adjusted gross income.

Still Time to Act to Avoid Surprises at Tax-Time

Still Time to Act to Avoid Surprises at Tax-Time

Even though only a few months remain in 2014, you still have time to act so you aren’t surprised at tax-time next year. You should take steps now to avoid owing more taxes or getting a larger refund than you expect.  Here are some actions you can take to bring the taxes you pay in advance closer to what you’ll owe when you file your tax return:

  • Adjust your withholding.  If you’re an employee and you think that your tax withholding will fall short of your total 2014 tax liability, you may be able to avoid an unexpected tax bill by increasing your withholding. If you are having      too much tax withheld, you may get a larger refund than you expect. In either case, you can complete a new Form W-4, Employee’s Withholding Allowance Certificate and give it to your employer. Enter the added amount you want withheld from each paycheck until the end of the year on Line 6 of the W-4 form. You usually can have less tax withheld by increasing your withholding allowances on line 5. Use the IRS Withholding Calculator tool on to help you fill out the form.
  • Report changes in circumstances.  If you purchase health insurance coverage through the Health Insurance Marketplace, you may receive advance payments of the premium tax credit in 2014. It is important that you report changes in circumstances to your Marketplace so you get the proper type and amount of premium assistance. Some of the changes that you should report include changes in your income, employment, or family size. Advance credit payments help you pay for the insurance you buy through the Marketplace. Reporting changes will help you avoid getting too much or too little premium assistance in advance.
  • Change taxes with life events. You may need to change the taxes you pay when certain life events take place. A change in your marital status or the birth of a child can change the amount of taxes you owe. When they happen you can submit a new Form W–4 at work or change your estimated tax payment.
  • Be accurate on your W-4.  When you start a new job you fill out a Form W-4. It’s important for you to accurately complete the form. For example, special rules apply if you work two jobs or you claim tax credits on your tax return. Your employer will use the form to figure the amount of federal income tax to withhold from your pay.
  • Pay estimated tax if required.  If you get income that’s not subject to withholding you may need to pay estimated tax. This may include income such as self-employment, interest, or rent. If you expect to owe a thousand dollars or more in tax, and meet other conditions, you may need to pay this tax. You normally pay the tax four times a year. Use Form1040-ES, Estimated Tax for Individuals, to figure and pay the tax.

For more see Publication 505, Tax Withholding and Estimated Tax. You can get it and IRS forms on, or call 800-TAX-FORM (800-829-3676) to get them by mail.

3.8% Net Investment Income Tax

Investment Income – Do I have to pay an additional tax?

You might, depending on a few important factors.

A 3.8% net investment income tax is imposed on the unearned income of high-income individuals. The tax is applied to an amount equal to the lesser of:

  • Your net investment income
  • The amount of your modified adjusted gross income (basically, your adjusted gross income increased by an amount associated with any foreign earned income exclusion) that exceeds $200,000 for a single person ($250,000 if married filing a joint federal income tax return, and $125,000 if married filing a separate return)

So if you’re single and have a MAGI of $250,000, consisting of $150,000 in earned income and $100,000 in net investment income, the 3.8% tax will only apply to $50,000 of your investment income.

The 3.8% tax also applies to estates and trusts. The tax is imposed on the lesser of undistributed net investment income or the excess of MAGI that exceeds the top income tax bracket threshold for estates and trusts ($12,150 in 2014). This relatively low tax threshold potentially could affect estates and trusts with undistributed income. Consult a tax professional.

What is net investment income?

Net investment income generally includes all net income (income less any allowable associated deductions) from interest, dividends, capital gains, annuities, royalties, and rents. It also includes income from any business that’s considered a passive activity, or any business that trades financial instruments or commodities.

Net investment income does not include interest on tax-exempt bonds, or any gain from the sale of a principal residence that is excluded from income. Distributions you take from a qualified retirement plan, IRA, 457(b) deferred compensation plan, or 403(b) retirement plan are also not included in the definition of net investment income.

If you are subject to the 3.8% net investment income tax, there are strategies to consider that may help you manage that tax.

Strategies on how to manage the net investment income tax

If you are subject to the 3.8% net investment income tax, there are strategies  that may help you manage that tax. The tax is applied to the lesser of your net investment income or the amount by which your modified adjusted gross income (MAGI) exceeds the applicable income tax threshold. MAGI is basically adjusted gross income plus any associated foreign earned income exclusion. Any strategy you consider should be directed at the appropriate target.

If your net investment income is greater than your MAGI over the threshold, then your focus should be aimed at reducing your MAGI. Conversely, if your MAGI over the threshold is greater than your net investment income, you should try to reduce your net investment income.

Here are a few strategies that may help you manage the net investment income tax:

  • Before selling appreciated securities, consider whether you can offset the gain with capital losses.  Likewise, if you have any capital loss carryforwards, you should review your portfolio for capital gain opportunities to make use of the capital losses.
  • Consider gifts of appreciated securities to tax-qualified charities.
  • If passive income is from a business, offset passive income with passive losses. If you don’t have passive losses, you may be able to convert the passive income to non-passive income (not subject to the tax) by becoming more active in the business.
  • You may be able to reduce your MAGI by increasing contributions to a traditional IRA, 401(k), or 403(b).
  • Consider investments that may have growth potential but typically do not generate dividends.
  • Generally, any gains in tax-deferred annuities and cash value life insurance are not reportable as income unless withdrawn, which may help reduce both your MAGI and your net investment income.

While any of these alternatives may help reduce your net investment income or your MAGI, they may also affect your financial planning. So before implementing strategies  to reduce or eliminate exposure to the net investment income tax,  consult with a tax professional to help with your specific situation.