The Internal Revenue Service (IRS) has recently introduced a 3.8% surtax on certain ‘unearned income’ of individuals, trusts and estates, which will be levied on income from January 1, 2013 onward. Taxpayers who meet the requirement will need to pay this tax. As it is a newly introduced tax, AG Tax professionals have prepared a brief summary on surtax, which may be useful to know as an U.S. taxpayer.
The 3.8% Net Investment Income Tax (NIIT)
The “net investment income tax” (NIIT), also known as the “unearned income Medicare contribution tax”, is an additional tax of 3.8% levied on the lesser amount of:
1) Net Investment Income (‘NII’) or
2) The excess of modified adjusted gross income (MAGI) over the threshold amount
How will the Net Investment Income Tax (NIIT) be reported?
The IRS has released draft Form 8960 in August, 2013, which has been developed for the purpose of reporting the NIIT. The NIIT will be reported as other taxes on line 60 of Form 1040 for individuals or on schedule G in Form 1041 for trust and estates. Please note that Form 8960 has not yet been finalized.
Who will pay the 3.8% Net Investment Income Tax (NIIT)?
Individuals, trusts, and estates will owe tax if they have net investment income, and also have Modified Adjusted Gross Income (MAGI) above their threshold limit. Please note that taxpayers may still be subject to the NIIT even if they are exempt from Medicare taxes.
MAGI Threshold Limit:
• $200,000 (single or head of household)
• $125,000 (married filing separately)
• $250,000 (married filing jointly or qualified Widow)
• $11,650 (trusts and estates)
Who is not subject to
Net Investment Income Tax (NIIT)?
• Non-resident aliens (NRAs)
• Certain trusts (consult with AG Tax for details)
What will be considered ‘net investment income’?
• Interests, dividends, and capital gains
• Annuities
• Rents and royalties
• Passive activity income
What will not be ‘net investment income’?
• Active trade or business income
• Interest, dividend, and capital gains derived from active trade or business
• Distributions from IRAs and other qualified retirement plans
• Income taken into account for self-employment tax purpose
The NIIT has a greater impact on taxpayers in higher income tax brackets, as the calculation is dependent on the MAGI and NII. If you are concerned about the Net Investment Income Tax, you should contact a qualified tax advisor to discuss your circumstances, and look into tax planning options.
AG Tax LLP Can Help
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of U.S. and Canadian tax laws as well as cross-border compliance.
Furthermore, as a full service accounting firm, AG Tax associates are dedicated to assist you with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 416-238-5920 (Greater Toronto Area, ON)
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.
