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

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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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