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 HealthCare.gov/how-do-i-report-life-changes-to-the-marketplace.

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.

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: http://www.fafsa-application.com/home.php?s=MSN, 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 IRS.gov.

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.

Keep More of Your Money – Easy to Understand Tax Tips

Tax Tips Easy-to-understand tips to keep more of your money

Let’s face it, taxes can be confusing. But you’re not alone. Here are some of Alice’s tax tips to help you through different stages in your life. If you have questions or need help with your taxes, you should always contact a tax professional.

New Baby

In order to claim your new child as a dependent on your tax return, the first thing you need to do is get him or her a Social Security number. If you don’t, you’ll delay the process. You can request a Social Security card at the hospital when you apply for a birth certificate.

$1,000 Child Credit

Kids are great. A new baby gives you a tax credit and the ability to claim a tax deduction until your child reaches the age of 17. With a credit, your tax bill is reduced dollar for dollar, while a deduction reduces the amount of income that Uncle Sam can touch. Income limits do apply, so ask your local tax pro for details.

Single Parent

If you’re a single parent, you may be able to file your returns as head of household rather than single. The advantage? You get a bigger standard deduction, and you’ll fit into a better tax bracket. In order to be considered head of household, you must pay more than half the cost of providing a home for a qualifying person (your child)

Childcare Expenses

Working parents, don’t miss this tax break on your childcare expenses. You qualify if:

  • Your child is younger than age 13, and
  • You pay someone else to watch your child while you work or look for work, and
  • You and your spouse have earned income, or one of you is a full-time student.

You can receive a 20–35% tax credit for up to $3,000 of your childcare expenses for one child, or up to $6,000 for two or more children. The credit is based on your income, so the more you make, the less credit you’ll receive.

If it’s available at your workplace, you might get a better deal by paying for childcare expenses through a Flexible Spending Account (FSA). The money you contribute is subtracted from your paycheck pre-tax, which means you’ll avoid paying federal, Social Security and Medicare taxes on that money. So, contributing the maximum $5,000 can save you at least $1,133—more if you are in a higher tax bracket. You’ll save even more if you live in a state that has an income tax.

Remember, you and your spouse might need to adjust your withholdings from work.

Newly Married

If you get a big tax refund each year, it doesn’t mean that you are getting a bonus from the government. You overpaid your taxes from the previous year, and they are just sending back your overpayment. That’s a bad idea. You just let the government use your money interest-free for one year. Make that money work for you!

Make sure that both of you adjust your withholdings at work. When you pay your taxes each year, you want to come as close to zero as possible (meaning you don’t owe the government, and they don’t owe you). This is true for singles and married couples.

Sending Kids to College

Did you know that Uncle Sam lets you deduct some of your tuition costs? Depending on your income and filing status, you can deduct up to $4,000 of college tuition and related fees. Also, you don’t have to itemize your deductions to claim it. Not a bad deal.

However, not all tuition and fees are eligible for the deduction. Only certain tuition costs and fees qualify, so you should speak with a tax advisor to see if you can save a few thousand dollars this year.

The American Opportunity Credit has been extended through 2017. Each eligible student can qualify for a maximum credit of $2,500.

Death in the Family

The federal estate tax applies only to estates that exceed $5.25 million, but state estate taxes can vary. Consult your local tax professional to find out how the laws affect your situation.

You will also need to file a final income tax return to comply with tax laws that ensure taxes on your loved-one’s income, before his or her death, doesn’t go uncollected. That responsibility falls to the executor of the estate or, if there is not an executor, a family member. The tax return is filled out the same way as if he or she was still alive, but “deceased” is written after the taxpayer’s name.

College Tax Credits for 2014 and Years Ahead

Back-to-School Reminder for Parents and Students: Check Out College Tax Credits for 2014 and Years Ahead

IR-2014-90, Sept. 15, 2014

WASHINGTON ― With another school year now in full swing, the Internal Revenue Service today reminded parents and students that now is a good time to see if they will qualify for either of two college tax credits or any of several other education-related tax benefits when they file their 2014 federal income tax returns.

In general, the American opportunity tax credit and lifetime learning credit are available to taxpayers who pay qualifying expenses for an eligible student. Eligible students include the taxpayer and his or her spouse and dependents. The American opportunity tax credit provides a credit for each eligible student, while the lifetime learning credit provides a maximum credit per tax return. Though a taxpayer often qualifies for both of these credits, he or she can only claim one of them for a particular student in a particular year. Claimed on Form 8863, these credits are available to all taxpayers — both those who itemize their deductions on Schedule A and those who claim a standard deduction.

For those eligible, including most undergraduate students, the American opportunity tax credit will generally yield the greater tax savings. Alternatively, the lifetime learning credit should be considered by part-time students and those attending graduate school.

Both credits are available for students enrolled in an eligible college, university or vocational school, including both nonprofit and for-profit institutions. Neither credit can be claimed by a nonresident alien, a married person filing a separate return or someone claimed as a dependent on another person’s return.

Normally, a student will receive a Form 1098-T from their institution by the end of January of the following year (Jan. 31, 2015 for calendar year 2014). This form will show information about tuition paid or billed along with other information. However, amounts shown on this form may differ from amounts taxpayers are eligible to claim for these tax credits. Taxpayers should see the instructions to Form 8863 and Publication 970 for details on properly figuring allowable tax benefits.

Many of those eligible for the American opportunity tax credit qualify for the maximum annual credit of $2,500 per student. Students can claim this credit for qualified educational expenses paid during the entire tax year for a certain number of years:

  • The credit is only available for 4 tax years per eligible student.
  • The credit is available only if the student has not completed the first 4 years of postsecondary education before 2014.

Here are some more key features of the credit:

  • Qualified education expenses are amounts paid for tuition, fees and other related expenses for an eligible student. Other expenses, such as room and board, are not qualified expenses.
  • The credit equals 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
  • The full credit can only be claimed by taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less. For married couples filing a joint return, the limit is $160,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $180,000 or more and singles, heads of household and some widows and widowers whose MAGI is $90,000 or more.
  • Forty percent of the American opportunity tax credit is refundable. This means that even people who owe no tax can get an annual payment of up to $1,000 for each eligible student.

The lifetime learning credit of up to $2,000 per tax return is available for both graduate and undergraduate students. Unlike the American opportunity tax credit, the limit on the lifetime learning credit applies to each tax return, rather than to each student. Also, the lifetime learning credit does not provide a benefit to people who owe no tax.

Though the half-time student requirement does not apply to the lifetime learning credit, the course of study must be either part of a post-secondary degree program or taken by the student to maintain or improve job skills. Other features of the credit include:

  • Tuition and fees required for enrollment or attendance qualify as do other fees required for the course. Additional expenses do not.
  • The credit equals 20 percent of the amount spent on eligible expenses across all students on the return. That means the full $2,000 credit is only available to a taxpayer who pays $10,000 or more in qualifying tuition and fees and has sufficient tax liability.
  • Income limits are lower than under the American opportunity tax credit. For 2014, the full credit can be claimed by taxpayers whose MAGI is $54,000 or less. For married couples filing a joint return, the limit is $108,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $128,000 or more and singles, heads of household and some widows and widowers whose MAGI is $64,000 or more.

You can use the IRS’s Interactive Tax Assistant tool to help determine if you are eligible for these benefits. The tool is available on IRS.gov. Eligible parents and students can get the benefit of these credits during the year by having less tax taken out of their paychecks. They can do this by filling out a new Form W-4, claiming additional withholding allowances, and giving it to their employer.

There are a variety of other education-related tax benefits that can help many taxpayers. They include:

  • Scholarship and fellowship grants — generally tax-free if used to pay for tuition, required enrollment fees, books and other course materials, but taxable if used for room, board, research, travel or other expenses.
  • Student loan interest deduction of up to $2,500 per year.
  • Savings bonds used to pay for college — though income limits apply, interest is usually tax-free if bonds were purchased after 1989 by a taxpayer who, at time of purchase, was at least 24 years old.
  • Qualified tuition programs, also called 529 plans, used by many families to prepay or save for a child’s college education.

Taxpayers with qualifying children who are students up to age 24 may be able to claim a dependent exemption and the earned income tax credit.

The general comparison table in Publication 970 can be a useful guide to taxpayers in determining eligibility for these benefits. Details can also be found in the Tax Benefits for Education Information Center on IRS.gov.

IRS Updates Phone Scams Warning

Link

IRS Updates Phone Scams Warning

The IRS is again warning the public about phone scams that continue to claim victims all across the country. In these scams, thieves make unsolicited phone calls to their intended victims. Callers fraudulently claim to be from the IRS and demand immediate payment of taxes by a prepaid debit card or wire transfer. The callers are often hostile and abusive.

The Treasury Inspector General for Tax Administration has received 90,000 complaints about these scams. TIGTA estimates that thieves have stolen an estimated $5 million from about 1,100 victims. To avoid becoming a victim of these scams, you should know:

  • The IRS will always first contact you by mail if you owe taxes, not by phone.
  • The IRS never asks for credit, debit or prepaid card information over the phone.
  • The IRS never insists that you use a specific payment method to pay your tax.
  • The IRS never requests immediate payment over the telephone.
  • The IRS will always treat you professionally and courteously. 

Scammers may tell would-be victims that they owe money and that they must pay what they owe immediately. They may also tell them that they are entitled to a large refund. Other characteristics of these scams include:

  • Scammers use fake names and IRS badge numbers to identify themselves.
  • Scammers may know the last four digits of your Social Security number.
  • Scammers spoof caller ID to make the phone number appear as if the IRS is calling.
  • Scammers may send bogus IRS emails to victims to support their bogus calls.
  • Victims hear background noise of other calls to mimic a call site.
  • After threatening victims with jail time or driver’s license revocation, scammers hang up. Others soon call back pretending to be from the local police or DMV, and caller ID again supports their claim.

If you get a phone call from someone claiming to be from the IRS, here’s what you should do:

  • If you know you owe taxes or you think you might owe taxes, call the IRS at 800-829-1040. IRS employees can help you with a payment issue if you owe taxes.
  • If you know you don’t owe taxes or don’t think that you owe any taxes, then call and report the incident to TIGTA at 800-366-4484.
  • If scammers have tried this scam on you, you should also contact the Federal Trade Commission and use their “FTC  Complaint Assistant” at FTC.gov. Please add “IRS Telephone Scam” to the comments of your complaint.

The IRS encourages you to be vigilant against phone and email scams that use the IRS as a lure. Visit the genuine IRS website, IRS.gov, to learn how to report tax fraud and for more information on what you can do to avoid becoming a victim.

Additional Medicare Tax

Additional Medicare Tax

On Nov. 26, 2013, the IRS issued final regulations (TD 9645) implementing the Additional Medicare Tax as added by the Affordable Care Act (ACA). The Additional Medicare Tax applies to wages, railroad retirement (RRTA) compensation, and self-employment income over certain thresholds. Employers are responsible for withholding the tax on wages and RRTA compensation in certain circumstances.

BASIC FAQs

1. When did Additional Medicare Tax start?

Additional Medicare Tax went into effect in 2013 and applies to wages, compensation, and self-employment income above a threshold amount received in taxable years beginning after Dec. 31, 2012.

2. What is the rate of Additional Medicare Tax?

The rate is 0.9 percent.

3. When are individuals liable for Additional Medicare Tax?

An individual is liable for Additional Medicare Tax if the individual’s wages, compensation, or self-employment income (together with that of his or her spouse if filing a joint return) exceed the threshold amount for the individual’s filing status:

Filing Status

Threshold Amount

Married filing jointly $250,000
Married filing separate $125,000
Single $200,000
Head of household (with qualifying person) $200,000
Qualifying widow(er) with dependent child $200,000

4. What wages are subject to Additional Medicare Tax?

All wages that are currently subject to Medicare Tax are subject to Additional Medicare Tax if they are paid in excess of the applicable threshold for an individual’s filing status. For more information on what wages are subject to Medicare Tax, see the chart, Special Rules for Various Types of Services and Payments, in section 15 of Publication 15, (Circular E), Employer’s Tax Guide.

5. What Railroad Retirement Tax Act (RRTA) compensation is subject to Additional Medicare Tax?

All RRTA compensation that is currently subject to Medicare Tax is subject to Additional Medicare Tax if it is paid in excess of the applicable threshold for an individual’s filing status. All FAQs that discuss the application of the Additional Medicare Tax to wages also apply to RRTA compensation, unless otherwise indicated.

6. Are nonresident aliens and U.S. citizens living abroad subject to Additional Medicare Tax?

There are no special rules for nonresident aliens and U.S. citizens living abroad for purposes of this provision. Wages, other compensation, and self-employment income that are subject to Medicare tax will also be subject to Additional Medicare Tax if in excess of the applicable threshold.

7. Will I also owe net investment income tax on my income that is subject to Additional Medicare Tax?

No. The tax imposed by section 1411 on an individual’s net investment income is not applicable to wages, RRTA compensation, or self-employment income. Thus, an individual will not owe net investment income tax on these categories of income, regardless of the taxpayer’s filing status. See more information on the Net Investment Income Tax.

INDIVIDUAL FAQs

Wages, RRTA Compensation, and Self-Employment Income

8. Will an individual owe Additional Medicare Tax on all wages, RRTA compensation and self-employment income or just the wages, RRTA compensation and self-employment income in excess of the threshold for the individual’s filing status?

An individual will owe Additional Medicare Tax on wages, compensation and self-employment income (and that of the individual’s spouse if married filing jointly) that exceed the applicable threshold for the individual’s filing status. Medicare wages and self-employment income are combined to determine if income exceeds the threshold. A self-employment loss is not considered for purposes of this tax. RRTA compensation is separately compared to the threshold.

9. Are wages that are not paid in cash, such as fringe benefits, subject to Additional Medicare Tax?

Yes. The value of taxable wages not paid in cash, such as noncash fringe benefits, are subject to Additional Medicare Tax, if, in combination with other wages, they exceed the individual’s applicable threshold. Noncash wages are subject to Additional Medicare Tax withholding, if, in combination with other wages paid by the employer, they exceed the $200,000 withholding threshold.

10. Are tips subject to Additional Medicare Tax?

Yes. Tips are subject to Additional Medicare Tax, if, in combination with other wages, they exceed the    individual’s applicable threshold. Tips are subject to Additional Medicare Tax withholding, if, in combination with other wages paid by the employer, they exceed the $200,000 withholding threshold.

Withholding and Estimated Tax Payments

(See Publication 505, Tax Withholding and Estimated Tax, for more information)

11. Will Additional Medicare Tax be withheld from an individual’s wages?

An employer must withhold Additional Medicare Tax from wages it pays to an individual in excess of $200,000 in a calendar year, without regard to the individual’s filing status or wages paid by another employer. An individual may owe more than the amount withheld by the employer, depending on the individual’s filing status, wages, compensation, and self-employment income. In that case, the individual should make estimated tax payments and/or request additional income tax withholding using Form W-4, Employee’s Withholding Allowance Certificate.

12. Will Additional Medicare Tax be withheld from an individual’s compensation subject to Railroad Retirement Tax Act (RRTA) taxes?

An employer must withhold Additional Medicare Tax from RRTA compensation it pays to an individual in excess of $200,000 in a calendar year without regard to the individual’s filing status or compensation paid by another employer. An individual may owe more than the amount withheld by the employer, depending on the individual’s filing status, wages, compensation, and self-employment income. In that case, the individual should make estimated tax payments and/or request additional income tax withholding using Form W-4, Employee’s Withholding Allowance Certificate.

Net Investment Income Tax (NIIT)

 

Basics of the Net Investment Income Tax (NIIT)

The Net Investment Income Tax is  imposed by section 1411 of the Internal Revenue Code. The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts.

The Net Investment Income Tax went into effect on Jan. 1, 2013. The NIIT affects income tax returns of individuals, estates and trusts, beginning with their first tax year beginning on (or after) Jan. 1, 2013. It does not affect income tax returns for the 2012 taxable year filed in 2013.

Individuals who are subject to the Net Investment Income Tax

Individuals will owe the tax if they have Net Investment Income and also have modified adjusted gross income over the following thresholds:

Filing Status

Threshold Amount

Married filing jointly

$250,000

Married filing   separately

$125,000

Single

$200,000

Head of household   (with qualifying person)

$200,000

Qualifying widow(er)   with dependent child

$250,000

Taxpayers should be aware that these threshold amounts are not indexed for inflation.

If you are an individual who is exempt from Medicare taxes, you still may be subject to the Net Investment Income Tax if you have Net Investment Income and also have modified adjusted gross income over the applicable thresholds.

For the purpose of  the Net Investment Income Tax, the modified adjusted gross income is the adjusted gross income (Form 1040, Line 37),  increased by the difference between amounts excluded from gross income under section 911(a)(1) and the amount of any deductions (taken into account in computing adjusted gross income) or exclusions disallowed under section 911(d)(6) for amounts described in section 911(a)(1). In the case of taxpayers with income from controlled foreign corporations (CFCs) and passive foreign investment companies (PFICs), they may have additional adjustments to their AGI. See section 1.1411-10(e) of the final regulations.

Individuals who are not subject to the Net Investment Income Tax

Nonresident Aliens (NRAs) are not subject to the Net Investment Income Tax. If an NRA is married to a U.S. citizen or resident and has made, or is planning to make, an election under section 6013(g) or 6013(h) to be treated as a resident alien for purposes of filing as Married Filing Jointly, the final regulations provide these couples special rules and a corresponding section 6013(g)/(h) election for the NIIT.

A dual-resident individual, within the meaning of regulation §301.7701(b)-7(a)(1), who determines that he or she is a resident of a foreign country for tax purposes pursuant to an income tax treaty between the United States and that foreign country and claims benefits of the treaty as a nonresident of the United States is considered a NRA for purposes of the NIIT.

A dual-status individual, who is a resident of the United States for part of the year and a NRA for the other part of the year, is subject to the NIIT only with respect to the portion of the year during which the individual is a United States resident. The threshold amount (described in # 3 above) is not reduced or prorated for a dual-status resident.

Estates and trusts might also be subject to the Net Investment Income Tax

Estates and trusts are subject to the Net Investment Income Tax if they have undistributed Net Investment Income and also have adjusted gross income over the dollar amount at which the highest tax bracket for an estate or trust begins for such taxable year under section 1(e) (for tax year 2013, this threshold amount is $11,950). Generally, the threshold amount for the upcoming year is updated by IRS each fall in a revenue procedure. For 2014, the threshold amount is $12,150 (See Rev. Proc. 2013-35).

There are special computational rules for certain unique types of trusts, such as Qualified Funeral Trusts, Charitable Remainder Trusts and Electing Small Business Trusts, which can be found in the final regulations (see # 20 below).

Estates and trusts that are not subject to the Net Investment Income Tax

The following trusts are not subject to the Net Investment Income Tax:

  1. Trusts that are exempt from income taxes imposed by Subtitle A of the Internal Revenue Code (e.g., charitable trusts and qualified retirement plan trusts exempt from tax under section 501, and Charitable Remainder Trusts exempt from tax under section 664).
  2. A trust or decedent’s estate in which all of the unexpired interests are devoted to one or more of the purposes described in section 170(c)(2)(B).
  3. Trusts that are classified as “grantor trusts” under sections 671-679.
  4. Trusts that are not classified as “trusts” for federal income tax purposes (e.g., Real Estate Investment Trusts and Common Trust Funds).
  5. Electing Alaska Native Settlement Trusts.
  6. Perpetual Care (Cemetery) Trusts.

Net Investment Income includes the following:

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 (within the meaning of section 469). To calculate your Net Investment Income, your investment income is reduced by certain expenses properly allocable to the income (see #13 below).

Types of income that are not Net Investment Income

Wages, unemployment compensation; operating income from a nonpassive business, Social Security Benefits, alimony, tax-exempt interest, self-employment income, Alaska Permanent Fund Dividends (see Rev. Rul. 90-56, 1990-2 CB 102) and distributions from certain Qualified Plans (those described in sections 401(a), 403(a), 403(b), 408, 408A or 457(b)).

Gains that are included in Net Investment Income

To the extent that gains are not otherwise offset by capital losses, the following gains are common examples of items taken into account in computing Net Investment Income:

  1. Gains from the sale of stocks, bonds, and mutual funds.
  2. Capital gain distributions from mutual funds.
  3. Gain from the sale of investment real estate (including gain from the sale of a second home that is not a primary residence).
  4. Gains from the sale of interests in partnerships and S corporations (to the extent the partner or shareholder was a passive owner). See section 1.1411-7 of the 2013 proposed regulations.

The Net Investment Income Tax does not apply to any amount of gain that is excluded from gross income for regular income tax purposes.

The pre-existing statutory exclusion in section 121 exempts the first $250,000 ($500,000 in the case of a married couple) of gain recognized on the sale of a principal residence from gross income for regular income tax purposes and, thus, from the NIIT.

Example 1: A, a single filer, earns $210,000 in wages and sells his principal residence that he has owned and resided in for the last 10 years for $420,000. A’s cost basis in the home is $200,000. A’s realized gain on the sale is $220,000. Under section 121, A may exclude up to $250,000 of gain on the sale. Because this gain is excluded for regular income tax purposes, it is also excluded for purposes of determining Net Investment Income. In this example, the Net Investment Income Tax does not apply to the gain from the sale of A’s home.

Example 2: B and C, a married couple filing jointly, sell their principal residence that they have owned and resided in for the last 10 years for $1.3 million. B and C’s cost basis in the home is $700,000. B and C’s realized gain on the sale is $600,000. The recognized gain subject to regular income taxes is $100,000 ($600,000 realized gain less the $500,000 section 121 exclusion). B and C have $125,000 of other Net Investment Income, which brings B and C’s total Net Investment Income to $225,000. B and C’s modified adjusted gross income is $300,000 and exceeds the threshold amount of $250,000 by $50,000. B and C are subject to NIIT on the lesser of $225,000 (B’s Net Investment Income) or $50,000 (the amount B and C’s modified adjusted gross income exceeds the $250,000 married filing jointly threshold). B and C owe Net Investment Income Tax of $1,900 ($50,000 X 3.8%).

Example 3: D, a single filer, earns $45,000 in wages and sells her principal residence that she has owned and resided in for the last 10 years for $1 million. D’s cost basis in the home is $600,000. D’s realized gain on the sale is $400,000. The recognized gain subject to regular income taxes is $150,000 ($400,000 realized gain less the $250,000 section 121 exclusion), which is also Net Investment Income. D’s modified adjusted gross income is $195,000. Since D’s modified adjusted gross income is below the threshold amount of $200,000, D does not owe any Net Investment Income Tax.

Net Investment Income includes interest, dividends and capital gains of children that are reported on the parents Form 1040 (Form 8814)

The amounts of Net Investment Income that are included on your Form 1040 by reason of Form 8814 are included in calculating your Net Investment Income. However, the calculation of your Net Investment Income does not include (a) amounts excluded from your Form 1040 due to the threshold amounts on Form 8814 and (b) amounts attributable to Alaska Permanent Fund Dividends.

Deductible investment expenses in computing NII

In order to arrive at Net Investment Income, Gross Investment Income (items described in items 7-11 above) is reduced by deductions that are properly allocable to items of Gross Investment Income. Examples of deductions, a portion of which may be properly allocable to Gross Investment Income, include investment interest expense, investment advisory and brokerage fees, expenses related to rental and royalty income, tax preparation fees, fiduciary expenses (in the case of an estate or trust) and state and local income taxes.

You may be subject to both the 3.8% Net Investment Income Tax and the additional .9% Medicare taxes, but not on the same type of income.

The 0.9% Additional Medicare Tax applies to individuals’ wages, compensation and self-employment income over certain thresholds, but it does not apply to income items included in Net Investment Income. See more information on the Additional Medicare Tax.

How the Net Investment Income Tax is Reported and Paid

Individuals, estates, and trusts will use Form 8960 to compute their Net Investment Income Tax.

For individuals, the tax will be reported on, and paid with, the Form 1040. For estates and trusts, the tax will be reported on, and paid with, the Form 1041.

The Net Investment Income Tax is subject to the estimated tax provisions

Individuals, estates and trusts that expect to be subject to the tax in 2013 or thereafter should adjust their income tax withholding or estimated payments to account for the tax increase in order to avoid underpayment penalties. For more information on tax withholding and estimated tax, see Publication 505, Tax withholding and Estimated Tax.

Tax credits may reduce the NIIT liability

Any federal income tax credit that may be used to offset a tax liability imposed by subtitle A of the Code may be used to offset the NII. However, if the tax credit is allowed only against the tax imposed by chapter 1 of the Code (regular income tax), those credits may not reduce the NIIT. For example, foreign income tax credits (sections 27(a) and 901(a)) and the general business credit (section 38) are allowed as credits only against the tax imposed by chapter 1 of the Code, and therefore may not be used to reduce your NIIT liability. If you take foreign income taxes as an income tax deduction (versus a tax credit), some (or all) of the deduction amount may deducted against NII.

The NIIT tax does not have to be withheld from wages, but you may request that additional income tax be withheld from your wages.

Examples of the Calculation of the Net Investment Income Tax

a. Single taxpayer with income less than the statutory threshold.

Taxpayer, a single filer, has wages of $180,000 and $15,000 of dividends and capital gains. Taxpayer’s modified adjusted gross income is $195,000, which is less than the $200,000 statutory threshold. Taxpayer is not subject to the Net Investment Income Tax.

b. Single taxpayer with income greater than the statutory threshold.

Taxpayer, a single filer, has $180,000 of wages. Taxpayer also received $90,000 from a passive partnership interest, which is considered Net Investment Income. Taxpayer’s modified adjusted gross income is $270,000.

Taxpayer’s modified adjusted gross income exceeds the threshold of $200,000 for single taxpayers by $70,000. Taxpayer’s Net Investment Income is $90,000.

The Net Investment Income Tax is based on the lesser of $70,000 (the amount that Taxpayer’s modified adjusted gross income exceeds the $200,000 threshold) or $90,000 (Taxpayer’s Net Investment Income). Taxpayer owes NIIT of $2,660 ($70,000 x 3.8%).

Additional Information

Additional  information about the Net Investment Income Tax

You can find additional information about the NIIT in the 2013 final regulations and in a new 2013 proposed regulation published on Dec. 2, 2013.

For taxable years beginning before Jan. 1, 2014 (e.g., calendar year 2013), taxpayers may rely on the 2012 proposed regulations (published on Dec. 5, 2012), the 2013 proposed regulations (published on Dec. 2, 2013), or the 2013 final regulations (published on Dec. 2, 2013) for purposes of completing Form 8960. However, to the extent that taxpayers take a position in a taxable year beginning before Jan. 1, 2014 that is inconsistent with the final regulations, and such position affects the treatment of one or more items in a taxable year beginning after Dec. 31, 2013, then such taxpayer must make reasonable adjustments to ensure that their Net Investment Income Tax liability in the taxable years beginning after Dec. 31, 2013 is not inappropriately distorted. For example, reasonable adjustments may be required to ensure that no item of income or deduction is taken into account in computing net investment income more than once, and that carryforwards, basis adjustments and other similar items are adjusted appropriately.

Obama Health Law: Failure To Comply Gets Costlier by 2016

One of the few things most Americans know about the Affordable Care Act, according to a new Kaiser Family Foundation poll, http://kff.org/health-reform/poll-finding/kaiser-health-tracking-poll-september-2013/, is that it imposes a penalty on those who fail to carry health coverage. Still, they may not realize the penalty gets a lot stiffer after 2014, potentially changing the calculation of whether it’s worth going without coverage.

Someone not insured by the end of the first quarter of 2014 will be assessed a penalty of $95 per adult and $47.50 per child or 1% of household income, whichever is higher.

The Internal Revenue Service will compute the 1% of household income penalty on any income in excess of the tax filing threshold, which would be about $10,000 next year. So a person with income of $50,000 would pay the 1% penalty on $40,000 of income, or $400.

In 2015, the penalties rise to $325 per person ($162.50 per child) or 2% of income. The following year, they rise to $695 per person ($347.50 per child) or 2.5% of income. In following years, the increase is tied to the rise in the cost-of-living rate.

No matter how much one’s income, the fine is capped at a level roughly equal to the cost of a basic policy available on one of the new health-insurance exchanges opening Tuesday.

All this means that for “the young invincible”, who is sure that they won’t get sick and don’t want to pay for health coverage, may find it advantageous in 2014 to pay the $95 penalty and take their chances. But by 2016, it will likely make more financial sense to go on the exchange and buy an inexpensive policy than to pay a large penalty and get nothing.

For most people, the penalty isn’t an issue because they already have qualifying health coverage from their employer or from a government program like Medicare.

The IRS will collect penalties but the agency is somewhat constrained in how it will be able to go after the money. Consumers won’t be subject to criminal penalties.

The health law prohibits the government from using liens or seizure of property to collect payments. The IRS hasn’t provided detailed guidance yet, but the agency has said that if someone owes a penalty, it “may offset that liability against any tax refund” due in future years.

Some people will be exempted from the health insurance requirement, including federally recognized Indian tribe members, prisoners and some religious groups. States can also provide hardship exemptions to individuals or families.