My topic today is the new 2013 investment Federal Income Tax rates and the additional medicare tax on higher wage earners. First of all, I’d like to clarify that unless you make over $400,000 as an individual, or $450,000 as a married couple filing jointly, your basic capital gain rate is not going up. To say it again, your rates are not going up for capital gains, or what we called qualified dividends (which are taxed exactly as capital gains). Here are the tables:
- For a single person having taxable income of up to $36,250, heads of households having taxable income of up to $48,600 or a married couple having taxable income up to $72,850, there is no capital gains tax whatsoever.
- For single people with taxable income over $36,250 but below $400,000, the old rate of 15% is still in effect.
- For married persons with taxable income above $72,850 but below $450,000, the 15% rate is still in effect.
- For head of households with taxable income above $48,600 but below $400,000, the 15% rate is still in effect.
There will, however, be a new investment income tax (not to be confused with capital gains taxes). This tax will apply to not only capital gains, but all unearned income, which is income not derived by anyone’s labor, sweat, entrepreneurship or a business in which a person is active. The investment income tax of 3.8% will apply to single people/head of household with modified adjusted gross incomes (MAGI) over $200,000 and married couples with MAGI over $250,000.
For example, if a married couple were making $400,000 of pure salary, they would not pay this 3.8% investment tax at all. If a married couple were making $450,000, $350,000 of salary and $100,000 of investment income or unearned income, then they would pay 3.8% on the $100,000 investment income. And if a married couple were earning $225,000 of salary and $50,000 of investment income, they would pay 3.8% on $25,000; the portion above the $250,000 MAGI threshold.
- First of all do not confuse the higher capital gains rates with the investment tax rate of 3.8 percent. They are two different taxes. However the investment tax rate will apply to capital gains if the investment tax threshold is reached. If the capital gains threshold of $400,000/$450,000 is reached then both taxes will apply on those capital gains above that amount.
- Basic capital gains rate are not going up for anyone who is single/head of household and has taxable income less than $400,000, or married and has taxable income less than $450,000 (however you may be subject to the new investment income tax.)
- For singles making more than $400,000 or married couples making more than $450,000, the rate, instead of the current 15%, will be 20%.
- The 3.8% investment income tax applies to any unearned income, including capital gains, for single/head of household taxpayers with MAGI above $200,000 total and married couples with MAGI above $250,000. Once above those limits, only the part that is investment income would be subject to this tax, not wages or salary.
- There is also a new medicare .9 percent tax on wage earners in effect for 2013 for single taxpayers, head of households and qualifying widows or widowers that have wages above $200,000 in the aggregate, so this is not an employer by employer tax. For married couples filing jointly the threshold on wages earned is $250,000. That also is the aggregate of all employes and the two filers aggregate total. So if each spouse earned $240,000 which combined is $480,000, then the tax will be imposed on $230,000 ($480,000-$250,000)
Happy Tax Season Everyone!