There are two major changes to how investment returns will be taxed in 2013 and beyond that will push investment tax rates as high as 23.8% for some high earning investors:
1. Fiscal Cliff Legislation: Capital gains & dividend tax rates are increasing from 15% to 20% for singles earning $400,000+ and couples earnings $450,000+. Earners in the lowest two income tax brackets will pay 0% on investment income.
Income Limits for Capital Gains & Dividend Tax Rates:
| Tax Rate | Single | Married | Head of Household |
|---|---|---|---|
| 0% | Up to $36,250 | Up to $72,850 | Up to $48,600 |
| 15% | $36,250 to $400k | $72,850 to $450k | $48,600 to $425k |
| 20% | Over $400k | Over $450k | Over $425k |
2. Medicare Tax: The Net Investment Income Tax is 3.8% and applies to “unearned” investment income for those with modified adjusted gross income over the following levels. Only investment income is subject to this extra tax. Investment income includes both capital gains from traditional asset classes (ex. stock sales, mutual fund distributions) as well as gain from the sale of investment real estate. Gains on the sale of a principal residence are only subject to this tax above the standard exemption amount ($250k for singles, $500k for married couples).
3.8% Net Investment Income Tax applies above these Income Thresholds:
| Filing Status | Income Threshold |
|---|---|
| Married filing jointly | $250,000 |
| Married filing separately | $125,000 |
| Single | $200,000 |
| Head of household | $200,000 |
| Qualifying widow(er) with dependent child | $250,000 |
Examples:
Married couple earning $400k of salary: No additional tax
Married couple earning $300k of salary & $100k of investment income: Pays 3.8% on the $100k investment income
Married couple earning $200k of salary & $100k of investment income: Pays 3.8% on the $50k investment income over the $250k income threshold
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