2013 Investment Tax Rates: The Fiscal Cliff Capital Gains Rate Increase & The New 3.8% Medicare Tax

manemptypockets

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. For those who cross the threshold, the higher rate only applies to capital gains over the threshold. For example, if you are single and earn $500k of which $200k is salary and $300k is capital gains, you would be taxed 15% on the first $200k ($400k limit minus $200k non-capital gains salary) and then taxed 20% on the remaining $100k in capital gains ($300k total capital gains minus $200k taxed at lower rate).

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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  • Steve North

    How does the long term capital gains work ex. Married couple earns $150,000 salary and $500,000 long term capital gains. Would they pay 15% on some of the capital gains and 20% on part of the investment income? I would assume they would owe $85,000 on long term capital gains and $15,200 on the new Medicare Tax.

    • Joanna Pratt

      Yes, you are exactly right. They would pay 15% on the capital gains up to the limit and 20% on capital gains over the limit. The limit for a married couple is $450k so in your example they would pay 15% on $300k ($450k minus $150k salary) and 20% on the remaining $200k for a total of $85k (as you state). The medicare tax of 3.8% applies to all of their investment gains over $250k so they will be taxed 3.8% on $400k ($650k minus $250k hurdle) for a total of $15.2k.

      For more details, see the official Taxpayer Relief Act: http://i2.cdn.turner.com/cnn/2013/images/01/01/american.taxpayer.relief.act.pdf

  • bill

    sould company for 1.000.000.00 what would tax be

    • Joanna Pratt

      If you are single, have no other income, and the cost basis of the company was zero, you would owe 15% on the first $400k and 20% on the next $600k. You would also owe an additional 3.8% on $800k ($1M minus $200k hurdle). So your total tax bill would be $210,400.

  • Jack

    I have an annuity that is going to pay out 50,000 per year for the next 20 years. My basis is roughly 500,000. Each year would I have to pay 15% unearned income tax on the 25,000 of the 50,000? Household income is roughly 175,000.

    • Joanna Pratt

      Annuity income is considered ordinary income like interest on a checking account or salary, not investment income, so you would be taxed at your normal rate of 28% federal income taxes (the income tax bracket for $175k) on $25k of taxable income ($50k income minus $500k/20 years basis).

  • pete

    We moved from our home in California in 2007 due to employment and in order to keep up had to rent it as we could not sell it. There have been small increments where we took over the utilities between renters. We currently earn 80k total as a married couple but after expenses (4 kids, business expenses etc) we are well below the 72k threshold. Are we exempt or stuck paying?

    • Joanna Pratt

      Yes, you are exempt from paying capital gains taxes if you fall under the $72,850 income threshold for married couples. If you end up selling your rental property for a large profit, however, you could owe capital gains taxes on your gains. If the property were your primary residence, you would be exempt from the first $500k in gains ($250k for single people), but since this is a rental property, capital gains taxes would apply to all gains that put you over the income threshold.

  • Margarida Brum

    My husband bought a home in Aug 2013 for 250k & sold in Sept 2013 for 302k. We are married filing jointly with 3 kids. How much would we have to pay in California for capital gains?

  • Mike

    My wife and I are retired with $60,000 income and will have $450,000 long-term capital gain from the Dell LBO. How will my tax obligation be determined?

    First $400k of LT gain @15% and next $50k @20%, plus $250k with 3.8% surtax, then 28% marginal tax rate for our regular income? Thanks

    • Joanna Pratt

      Very close. Your numbers would be correct if your income were $50k, not $60k.

      Your $60k of ordinary income counts toward the $450k income limit for married people. This means you can have up to $390k of capital gains taxed at 15% ($450k limit minus $60k salary). Anything above that will be taxed at 20%. So in your case, with $450k of capital gains, $390k would be taxed at 15% and $60k would be taxed at 20%.

      For the 3.8% surtax, the income hurdle for married people is $250k. You have $510k in total income so this tax applies to $260k ($510k minus $250k hurdle) of your capital gains.

      In summary:
      $60k salary – ordinary income tax rate
      $390k of capital gains – 15% capital gains tax
      $60k of capital gains – 20% capital gains tax
      $260k of capital gains – 3.8% net investment income tax

      • Mike

        Thanks for the prompt response!

      • chris

        curious to why the cap. gain up to $72.5K (72.5K-60K salary = 12.5K) is not taxed at 0%. Am i missing something here?

  • chicago

    i am married with two children I sold my house and I made 40000.00.what is my tax rate
    do i have to show it in my income tax next year.

    • Joanna Pratt

      The first $250k of capital gains on the sale of a primary residence is tax-free for individuals. For married couples the exclusion is $500k. You should still report this and any other income on our income taxes, but your $40k gain should be tax free.

  • Tony

    I am 65 yr. old and on SSDI . My income is $13,416 .00 a year . I sub divided my property I have owned for over 5 years and sold 2 lots one for $75,000.00 (with the main house on it ) and one for $30,000.00 .It cost me $8,000.00 in fee’s to sell it and over $55,000.00 to pay off the loan . I did not live on the property . I can’t live off what I make on SSDI now and I am spending my saving on living expense’s . What is the Government going to charge me ?

  • brian

    what if you have only SS as income, what is the capital gains rate ?

  • lgillman

    If an S Corporation sells its assets and liquidates. The gain from sale of business assets gets taxed at capital gain rates; is that subject to the 3.8% unearned investment income Medicare tax? If it sells all its assets and distributes the proceeds, is the amount of gain over the stockholder’s basis consider unearned investment income for purposes of the 3.8% Medicare tax?

    • MG CPA

      Yes !

      • MG CPS

        Subject to , but may not be
        taxed !

    • MG CPA

      Subject to ; but may not be taxed!

  • Jess

    Recently flipped a house short term. Agi for previous year was around 72k. Wondering if I will be paying a short term capital gain tax or if I’m exempt bc of being under the threshold.

    • MG CPA

      Flip the house . Profit is taxed as
      short term gain . If in business then
      A Sch. ” c ” tax form should be
      considered rather the ” d. ” tax
      form; part of the 1040. The Sch
      ” C. ” has self employment tax
      issues in addition to any
      income taxes . Check w / your
      CPA .

      MG. CPA

  • Chris

    I am so confused I am a widow my escrow is closing Jan 2014, I am on a fixed income and for 2014 will be $31.000 for the year. I paid $163.000 for my home in 1997 and selling it for $365,000. closing in Jan. I am purchasing another property for $187.000 I have had the home rented for 13 years, do to loss of income (less then $15.000 a year 2011, 12.& 13 ) I could not stay in the home and had to rent it and move to a travel trailer for the last 3 years. I am now able to move into a home again, but feel I am so screwed. could you please explain what i will have to pay the government.

    • Maxime Rieman

      I’m sorry Chris, but Joanna is no longer available to provide an answer to your question. If you would like free advice and an answer from an RIA, please try our Ask an Advisor service here:
      http://www.nerdwallet.com/finance/question
      Or, if you would like an answer from a member of NerdWallet’s Investing team, please let me know in a comment below.

  • NewAtThis

    I am 55 yrs old single; earned income of 33000 plus capital gains of 62000 with charitable contributions of the 50 % bracket in the amount of 20,000. What would the fed tax be?

    • Maxime Rieman

      I’m sorry, but Joanna is no longer available to provide an answer to your question. If you would like free advice and an answer from an RIA, please try our Ask an Advisor service here:
      http://www.nerdwallet.com/finance/question
      Or, if you would like an answer from a member of NerdWallet’s Investing team, please let me know in a comment below.

  • DCH

    My wife and I earned approximately $150,000 last year. In addition I sold my business capital gain minus basis is $1,178,000 (long term). Additionally, we earned $48,000 in short term capital gains. What is our approximate tax liability?

    • Maxime Rieman

      I’m sorry, but Joanna is no longer available to provide an answer to your question. If you would like free advice and an answer from an RIA, please try our Ask an Advisor service here:
      http://www.nerdwallet.com/finance/question
      Or, if you would like an answer from a member of NerdWallet’s Investing team, please let me know in a comment below.

  • Helene

    We are 80 years old with low income (0% tax bracket) We plan to sell our home, which we built 40 years ago, and will realize a profit of @ $700,000. Will that gain increase our tax bracket, or we avoid paying capital gains tax altogether?

  • lance

    My tax rate is 0 based on income of 3600 excluding SS. I have a short term gain of $1108 and a long term gain of $6477 on sales of stock. How do I find out what tax, if any, is due on these capital gains?

  • Jerry McDermott

    No tax forms mention “Fiscal Cliff Legislation”. Schedule D is just simply telling to add up short-term and long-term gains (schedule D lines 7 and into line 16), then the result is carried over to the form 1040. Could you clarify where are these long term rates you mention come into play in the tax forms?