Per the U.S. Supreme Court, every citizen has every right to save taxes legally

Per the U.S. Supreme Court, every citizen has every right to save taxes legally

 

The U.S. Supreme Court decision, that it is every taxpayer’s right to legally save taxes, has been around for one hundred forty years.

“The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted.”  United States v. Isham, 84 U.S. 496, 506, 21 L. Ed. 728 (1873); Gregory v. Helvering, 293 U.S. 465, 469, 55 S. Ct. 266, 267 (1935); Superior Oil Co. v. Mississippi, 280 U.S. 390, 395, 396, 50 S. Ct. 169, 74 L. Ed. 504 (1930); Jones v. Helvering, 63 App. D.C. 204, 71 F.2d 214, 217 (D.C. Cir. 1934).

Almost one hundred years ago, the Supreme Court held further that “A taxpayer may resort to any legal methods available to him to diminish the amount of his tax liability.”  Bullen v. State of Wisconsin, 240 U.S. 625, 630, 36 S. Ct. 473, 60 L. Ed. 830 (1916). In Iowa Bridge Co. v. Comm., 39 F.2d 777, 781 (8^th Cir. 1930), the Eighth Circuit said: ‘In fact, it is held that even thought the transaction is a device to avoid the burden of taxation, or to lessen that burden, it is not for that reason alone illegal.‘

So with this holiday season upon us, keep in mind that it is perfectly legal to choose transactions tax favorably.

 

Swiss banks likely to cave and disclose U.S. accounts to U.S. authorities

Switzerland's private banks are deciding whether to disavow centuries of secrecy and bow to U.S. pressure to disclose accounts of U.S. persons.  The Swiss banks are otherwise going to have to face fines and possible criminal prosecution.

Most of the smaller banks are expected to participate but are wrestling with the risk of customer backlash if they concede and disclose customer confidentiality.

Back in 2009, Switzerland's largest bank, UBS was fined $780 million and handed over the names of its U.S. customers to avoid facing criminal charges.

If you are a U.S. person with an account in Switzerland and have not properly reported same, you should seriously consider entering the voluntary offshore account program offered by the Internal Revenue Service.

Internal Revenue Service extends deadline for abused innocent spouses to apply for relief from 2 years to 10 years

Internal Revenue Service extends deadline for abused innocent spouses to apply for relief from 2 years to 10 years

 

To help victims of domestic violence and others, the Internal Revenue Service has proposed rules to extend from 2 years to 10 years, the amount of time taxpayers can apply for "innocent spouse" relief.

Every year approximately 50,000 people apply for innocent spouse relief and some of them are involved in domestic disputes or physical abuse.

IRS said it would stop enforcing a two-year deadline to file an innocent spouse relief application in 2011. The recent proposal would make the 10-year deadline permanent in law.

The proposed rules also stop the IRS from demanding unpaid taxes while the innocent spouse application is being processed.

 

Recent Tax Court Case outlines the factors in determining whether the Commissioner’s determination of a fraud penalty should be upheld against a taxpayer omitting income

Recent Tax Court Case outlines the factors in determining whether the Commissioner’s determination of a fraud penalty should be upheld against a taxpayer omitting income

 

In McClellan v. Comm., T.C. Memo. 2013-251 (Oct. 31, 2013), Tax Court Judge Laro discussed the nine factors for whether to impose the 75% penalty found in I.R.C. Sec. 6663.  They are referred to as nonexclusive “badges of fraud” from which the Court may infer a taxpayer's fraudulent intent.  They are: (1) understating income, (2) maintaining inadequate records, (3) failing to file tax returns, (4) giving implausible or inconsistent explanations of behavior, (5) concealing assets, (6) failing to cooperate with tax authorities, (7) engaging in illegal activities, (8) attempting to conceal illegal activities, and (9) dealing extensively in cash.  Bradford v. Comm., 796 F.2d 303 (9^th Cir. 1986).  Here, there were six of the nine present: 1, 2, 4, 5, 6 and 9.  The court therefore determined that the Commissioner had proven fraud by clear and convincing evidence.

 

This case highlights how fraud cases are dealt with currently by the Tax Court.

Federal District Court in Wisconsin Rules Parsonage Allowance to Clergy is Unconstitutional

Federal District Court in Wisconsin Rules Parsonage Allowance to Clergy is Unconstitutional

The United States District Court for the District of Wisconsin in Freedom from Religion Foundation, Inc. v. Lew, 112 AFTR 2d ¶ 2013-5565 (D. Wis. 2013) has held that the clergy housing parsonage allowance pursuant to Code Sec. 107(2) is unconstitutional. It issued an injunction ordering the Commissioner of Internal Revenue to stop allowing the exclusion to gross income.  The Order is not to take effect until the conclusion of any appeals (sure to be) filed by the Government.  FFRF is a non-profit organization that advocates for the separation of church and state that brought the action against the Treasury Department and Internal Revenue Service. 

Pursuant to Code Sec. 107, in the case of a minister of the gospel, gross income does not include:

(1) The rental value of a home furnished to him, or the cost of utilities paid for him, as part of his compensation; or

(2)  The rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.

The Internal Revenue Service has previously ruled in Rev. Rul. 70-549, 1970-2 CB 16 that the parsonage allowance exclusion only applies to a duly ordained, licensed, or commissioned member of the clergy.

The case is legally fascinating on many levels.  The suit sought a declaration that the parsonage allowance violates the equal protection clause of the Fifth Amendment and the Establishment Clause of the U.S. Constitution.  FFRF had a couple of hurdles to climb. 

First, FFRF needed to show it had standing to sue and it successfully accomplished this by claiming that it was – in fact – injured because its owners were denied the exemption that the clergy receives.  Second, FFRF needed to show that the parsonage allowance violates the establishment clause. The District Court here agreed with FFRF and relied upon Texas Monthly, Inc. v. Bullock, (Sup Ct 1989) 489 U.S. 1 (1989) which held that a state statute exempting religious writings from sales tax was unconstitutional.  

In developing its reasoning, the District Court stated that a reasonable observer would view the parsonage allowance as an endorsement of religion.  Stay tuned as this landmark decision will be most certainly appealed through the appellate court and most likely the Supreme Court and Congress may be asked to weigh in and perhaps redraft the parsonage allowance in a way that does not violate the Constitution.

Internal Revenue Service Aggressively Pursuing U.S. Banks For Ties To Offshore Accounts

Internal Revenue Service Aggressively Pursuing U.S. Banks For Ties To Offshore Accounts

The Internal Revenue Service is issuing “John Doe” Summonses on major U.S. based banks.  The IRS uses John Doe summonses to obtain information concerning possible tax fraud by persons whose identities are unknown. Two federal judges from the Southern District of New York have authorized the summonses on five banks (Bank of New York Mellon (“Mellon”), Citibank, JP Morgan Chase Bank (“Chase”), HSBC Bank USA (“HSBC”), and Bank of America (“BOA”) requiring them to produce records relating to U.S. taxpayers with offshore accounts

Judge Kimba Wood authorized the summonses on November 7, requiring Mellon and Citibank to produce information about U.S. taxpayers by holding interests in undisclosed accounts at Zurcher Kantonalbank and its affiliates (“ZKB”) in Switzerland.  Then on November 12, Judge Richard Berman authorized the summonses requiring Mellon, Citibank, Chase, HSBC and BOA to produce similar information in connection with undisclosed accounts at The Bank of N.T. Butterfield & Son Limited and its affiliates (“Butterfield”) in various offshore locations including the Bahamas, Barbados, Cayman Islands, Guernsey, Hong Kong, Malta, Switzerland, and the United Kingdom. The summonses seek records identifying U.S. taxpayers with accounts at ZKB and Butterfield.

According to the Department of Justice (“DOJ”), the IRS Offshore Voluntary Disclosure programs have identified 371 previously undisclosed accounts at ZKB and 81 such accounts at Butterfield.  As such, the IRS has reason to believe that other U.S. taxpayers may hold undisclosed accounts at ZKB and Butterfield in violation of federal tax law.

The Offshore Voluntary Disclosure programs have thus been successful in not only getting taxpayers to fess up (without risk of criminal prosecution) but those who have come forward have helped the Internal Revenue Service to understand the processes used and thereby find the taxpayers who have not come forward and pursue them more aggressively.

Per IRS: Married same sex couples are married but unwed same sex couples are not

Per IRS:  Married same sex couples are married but unwed same sex couples are not

In June, the United States Supreme Court in U.S. v. Windsor, 111 AFTR 2d 2013-2385, struck down section 3 of the Defense of Marriage Act (DOMA).  As such, the Internal Revenue Service determined that married same-sex couples are married for federal tax purposes. However, the IRS's website continues unequivocally that same sex (and opposite sex) individuals who are in registered domestic partnerships, civil unions, or other similar relationships that are not considered marriages under State law are not considered as married for federal tax purposes.  Thus, those couples are not permitted to file federal tax returns using a married filing jointly or married filing separately status.

All other Code provisions that only apply to married taxpayers similarly do not apply to registered domestic partners. They are simply not married for federal tax purposes.

Also, if the partner is dependent, he cannot be claimed as a dependent because he is not one of the specified related individuals in Code Sec. 152(c) or Code Sec. 152(d) that qualifies the taxpayer to file as head of household.  

Domestic partners who reside in community property states and who are subject to their State's community property laws are also addressed by the Internal Revenue Service website.  Registered domestic partners must each report their own separate income plus half the combined community income earned by the partners.

Internal Revenue Service to get tougher

Internal Revenue Service to get tougher

Most people fear an Internal Revenue Service audit but starting in January the IRS will start setting strict deadlines for compliance with its Information Document Requests (“IDR”).

While those deadlines currently do not exist, for wealthy taxpayers and companies with more than $10 million in assets, the deadlines will apply.  Initial IDRs will not be under a strict guideline.  But if the initial deadline is not met, then under the new policy, a 49-day clock will start ticking.

After two warnings, a 49 day warning goes into effect.  If the information still is not divulged, the agency will go to federal court to seek a summons.  This step could expose the audit to the public and pose a risk to investors because the existence of an IRS summons can signal IRS trouble for a company, risking a blow to investor confidence and ultimately the share price.

The compressed timeframes can yield uncertainty and there will be more court cases involving summons enforcement.

Internal Revenue Service Aggressively Pursuing U.S. Banks For Ties To Offshore Accounts

The Internal Revenue Service is issuing “John Doe” Summonses on major U.S. based banks.  The IRS uses John Doe summonses to obtain information concerning possible tax fraud by persons whose identities are unknown. Two federal judges from the Southern District of New York have authorized the summonses on five banks (Bank of New York Mellon (“Mellon”), Citibank, JP Morgan Chase Bank (“Chase”), HSBC Bank USA (“HSBC”), and Bank of America (“BOA”) requiring them to produce records relating to U.S. taxpayers with offshore accounts

Judge Kimba Wood authorized the summonses on November 7, requiring Mellon and Citibank to produce information about U.S. taxpayers by holding interests in undisclosed accounts at Zurcher Kantonalbank and its affiliates (“ZKB”) in Switzerland.  Then on November 12, Judge Richard Berman authorized the summonses requiring Mellon, Citibank, Chase, HSBC and BOA to produce similar information in connection with undisclosed accounts at The Bank of N.T. Butterfield & Son Limited and its affiliates (“Butterfield”) in various offshore locations including the Bahamas, Barbados, Cayman Islands, Guernsey, Hong Kong, Malta, Switzerland, and the United Kingdom. The summonses seek records identifying U.S. taxpayers with accounts at ZKB and Butterfield.

According to the Department of Justice (“DOJ”), the IRS Offshore Voluntary Disclosure programs have identified 371 previously undisclosed accounts at ZKB and 81 such accounts at Butterfield.  As such, the IRS has reason to believe that other U.S. taxpayers may hold undisclosed accounts at ZKB and Butterfield in violation of federal tax law.

The Offshore Voluntary Disclosure programs have thus been successful in not only getting taxpayers to fess up (without risk of criminal prosecution) but those who have come forward have helped the Internal Revenue Service to understand the processes used and thereby find the taxpayers who have not come forward and pursue them more aggressively.

Negotiations on a tax information exchange agreement between the U.S. and the Cayman Islands conclude

The Cayman authorities have announced that the Cayman Islands and the United States have “concluded negotiations” regarding the Foreign Account Tax Compliance Act (FATCA).   The consensus reached a Model 1 Intergovernmental Agreement (IGA) and a new tax information exchange agreement (TIEA).  The United States has been putting pressure on foreign governments in its initiative to gather tax dollars from U.S. citizens and permanent residents who have assets overseas but are not reporting the income.  Under this pressure, Wayne Panton, the Cayman's minister for financial services said: “as an international financial center that contributes to the efficient functioning of global markets, the initialing and subsequent signing of the IGA and new TIEA with the United States will again demonstrate Cayman's commitment to engage in globally accepted tax and transparency initiatives.”

We have all heard of late, the cooperation that has been occurring between the U.S. and the Swiss Government and between the U.S. and the Israeli Government.  Any U.S. citizen or resident with assets overseas – whether in Switzerland, Israel, Cayman or anywhere else, that has not been properly reporting same, should consider speaking to an attorney to discuss the alternatives.

John Hom gets caught “all in” by Tax Court

John Hom gets caught “all in” by Tax Court

Poker player John Hom’s bluff was called in a U.S. Tax Court decision: John C. Hom v. Comm., T.C. Memo 2013-163 (Tax Ct Memo 2013).  Hom had failed to substantiate his gambling losses so his winnings were unreported.  He represented himself at trial.

Background:   Net gambling winnings are taxable while net gambling losses are not deductible.  I.R.C.  §165(d).  This rule also applies to professional poker players where gambling losses exceed gambling income.

Decision:  Hom earned income from various poker tournaments including a $136,695 victory from Grand Sierra Resort & Casino in 2007.  Yet he reported net gambling losses in each year.  The Court held that he could not substantiate his losses or his expenses and charged him with tax on the winnings.  Hom asked the court to let him estimate, but that plan got trumped by the Tax Court because there was no evidence from which to estimate.  The court allowed only a few hundred dollars for entry fees.  Additionally, the court imposed accuracy related penalties pursuant to I.R.C. § 6662 of 20% of the underpayment.

Conclusion:  Representing yourself in the Tax Court can be disastrous.  Gamblers (like all taxpayers) must keep accurate records of their expenses and losses or risk losing the ability to claim the deductions.

 

 

Appellate Court affirms the Tax Court that the period to Petition the Tax Court for denial of a collection due process hearing is 30 days

In Gray v. Comm., 112 AFTR 2d ¶ 2013-5103 (7^th Cir. 7/23/2013), the Seventh Circuit Court of Appeals upheld the determination of the Tax Court and found that the Tax Court lacked jurisdiction to review a collection action because more than 30 days had elapsed.

The Seventh Circuit concluded that the Tax Court properly determined that it lacked jurisdiction where the taxpayer failed to comply with the 30-day time limit pursuant to Code Sec. 6330(d)(1).  Section 6330(d)(1) is the section providing the Tax Court with jurisdiction to appeal a notice of determination after a collection due process (“CDP”) hearing.  In Gray, the taxpayer attempted to use the traditional 90-day time limit for challenging a notice of deficiency under Code Sec. 6213(a).  But the 7^th Circuit found that Sec. 6213 was only applicable to notices of deficiency, not denial of collection due process.

By way of background, taxpayers are entitled to a CDP hearing pursuant to Sec. 6330(b)(1) prior to collection activity taking place.  Prior to levying on property, the IRS is required to provide written notice to the taxpayer of the taxpayer’s right to a hearing to dispute the collection action.  Code Sec. 6330(a).  If the taxpayer requests a hearing within 30 days of the notice, an IRS appeals officer (with no prior involvement in the matter) will review the issues that the taxpayer requests. Code Sec. 6330(b) and (c). After the hearing, the IRS will issue a notice of determination, ruling on whether the proposed collection action is justified after considering the taxpayer's objections. Code Sec. 6330(c)(3).  If the taxpayer is not satisfied with the determination, he may within 30 days of such a determination Petition the Tax Court. Code Sec. 6330(d)(1).

Procedurally, in the Gray case, the taxpayer filed the Petition more than 30 days after receiving the notice of determination.  Thus, the IRS filed a motion to dismiss for lack of jurisdiction based on filing out of time. While the taxpayer objected to the motion the Tax Court sided with the IRS and the 7^th Circuit followed.

 

Conclusion, when petitioning the Tax Court for review of a determination of a collection due process hearing, be certain to file within the 30 day time period or be barred from further appeals.

 

Good news for innocent spouses

The Internal Revenue Service (“Service”) has announced that it will not contest the application of a case that went against it: the case of Wilson v. Comm., 111 AFTR 2d 2013-522 (9^th Cir. 2013) which had affirmed TC Memo 2010-134.  The Service did this in a pronouncement called an Action on Decision - AOD 2013-007, 06/04/2013.  This AOD means that the Service will no longer argue in innocent spouse equitable relief cases either that the Tax Court's review is limited to determining whether the Service abused its discretion, or that the court's review is otherwise limited by the administrative record developed before trial.

By way of background, Sec. 6015 of the Internal Revenue Code affords relief from joint and several liability on a joint return to certain spouses, including equitable relief under Sec. 6015(f) where other relief provided by Sec. 6015 is not available. Sec. 6015(e)(1) provides that the United State Tax Court has jurisdiction to “determine the relief available” to one who files a proper and timely Petition requesting equitable relief.  The Service had previously argued in these cases that the scope of the Tax Court's review was limited to determining whether the Service had abused its discretion in denying equitable relief, and should be confined to matters contained in the administrative record.   Based upon the AOD, it will no longer argue either of those positions in the Tax Court.

The Tax Court had been rejecting the Service’s position in previous cases such as Porter v Comm., 130 TC 115 (2008) and Porter v. Comm., 143 TC 203 (2009), and then Wilson.  The Tax Court in Porter I, Porter II and Wilson and then the 9^th Circuit in Wilson all ruled against the Service and determined that the Tax Court review of the case was de novo and not confined to the administrative record.  So the Courts have stated, and the Service has now conceded, that the Tax Court is not limited to evidence developed in the administrative record and may look to other facts and the Tax Court's ability to grant relief is not dependent on a finding that the IRS abused its discretion in denying relief.

So now if the Service denies innocent spouse relief, instead of having to prove that the Service abused its discretion, a taxpayer must now only show she is entitled to such relief and if facts were not presented to the Service earlier, they may be presented for the first time in the Tax Court.  This is a significant victory for innocent spouses who are stonewalled by the Service and may even make the Service kinder and gentler knowing that the Tax Court will take a fresh look at the case.

John Hom gets caught “all in” by Tax Court

Poker player John Hom’s bluff was called in a U.S. Tax Court decision: John C. Hom v. Comm., T.C. Memo 2013-163 (Tax Ct Memo 2013).  Hom had failed to substantiate his gambling losses so his winnings were unreported.  He represented himself at trial.

Background:   Net gambling winnings are taxable while net gambling losses are not deductible.  I.R.C.  §165(d).  This rule also applies to professional poker players where gambling losses exceed gambling income

Decision:  Hom earned income from various poker tournaments including a $136,695 victory from Grand Sierra Resort & Casino in 2007.  Yet he reported net gambling losses in each year.  The Court held that he could not substantiate his losses or his expenses and charged him with tax on the winnings.  Hom asked the court to let him estimate, but that plan got trumped by the Tax Court because there was no evidence from which to estimate.  The court allowed only a few hundred dollars for entry fees.  Additionally, the court imposed accuracy related penalties pursuant to I.R.C. § 6662 of 20% of the underpayment.

Conclusion:  Representing yourself in the Tax Court can be disastrous.  Gamblers (like all taxpayers) must keep accurate records of their expenses and losses or risk losing the ability to claim the deductions.

IRS rescinds Offshore Voluntary Disclosure Program acceptance for some applicants

In a surprise development, IRS has been informing U.S. taxpayers who are clients of Israel's Bank Leumi that the agency has rescinded their prior acceptance into the Offshore Voluntary Disclosure Program (OVDP), various news outlets have reported. IRS issued a statement that it is prohibited by federal law from commenting on specific cases. However, the agency acknowledged that the “particular declination letter” sent to the affected taxpayers is only used “in rare circumstances.” There are several situations that can result in disqualification from participation in the program, IRS said. One example is the taxpayer's failure to make a timely, truthful and complete disclosure of relevant information. There has been rampant speculation as to the underlying reason for IRS's rescission of acceptances into the OVDP. For example, the agency may already have had the name of a taxpayer on a list of people holding secret accounts and improperly processed such information internally. Another possibility offered by attorneys is that IRS may be cherry-picking those it wants to prosecute. There are reports that some clients of Israel's Mizrahi Tefahot Bank also have received declination letters.

Supreme Court hears two days of oral arguments on the constitutionality of DOMA in an estate tax case

The United States Supreme Court, in the estate tax case of Windsor v. U.S., is considering the constitutionality of the Defense of Marriage Act (DOMA).  It is a highly anticipated case and is considered such a landmark important case that the Court heard two days of oral argument. The case concerns a surviving same-sex spouse who is seeking an estate tax refund.  An estate tax was paid because assets were left to a same sex spouse and the Internal Revenue Code under DOMA requires that no marital deduction is available for the estate. Although DOMA is not generally a tax law, it carries tax consequences for same-sex couples by requiring that they be treated as unmarried for Federal law purposes. The Court's decision may potentially have a major impact on the administration of the IRC.

By way of background, in 1996, Congress enacted, and President Clinton signed DOMA which in Section 3 defines marriage as the “legal union between one man and one woman as husband and wife.”

 

The district court and the Second Circuit Court of Appeals both found in favor of the Taxpayer and ruled the provision of DOMA requiring a man and a woman for a marriage to be unconstitutional. 

 

While waiting to see if the Supreme Court follows the lower Courts, it is generally recommended that same-sex couples in domestic partnerships or civil unions or marriages file protective claims for refund in the event that DOMA is invalidated.  The impact of the decision may affect income tax as well so stay tuned for the result of what could be a monumental decision.

 

 

The American Taxpayer Relief Act of 2012 (“ATRA 2012”) made substantial estate, gift and generation skipping changes and these changes are ostensibly permanent.  These changes are summarized as follows:
The exemption amount is now $5 million per person, indexed for inflation after 2011. (For transfers in 2013, the exemption is $5.25 million.)  The rate of tax is a flat 40% above the exemption.  Portability is preserved meaning if the surviving spouse files a timely election on the Estate Tax return of the first spouse to die, the surviving spouse inherits any unused portion of the exemption from the predeceased spouse.
There are still many opportunities for tax reduction including using grantor retained annuity trusts (“GRATs”) and discounting through family limited partnerships (“FLPs”) and family limited liability companies (“FLLCs”).
According to a recently issued Congressional Research Service (CRS) report these “permanent” changes may be changed soon. It notes that there are some lingering proposals to crack down on perceived abuses.  These changes include:
GRAT reform - A proposal would impose a minimum annuity term of 10 years, disallow any decline in the annuity, and require a non-zero remainder interest. 
FLP and FLLC reform - Another proposal would disallow discounts for interests in FLPs and FLLCs. Courts will generally allow estates to reduce the fair market value when assets, including marketable securities, are left in FLPs or FLLCs.
Consistent valuation requirement. Currently, there is no explicit rule requiring the same valuation of fair market value of an estate asset for estate tax purposes versus for purposes of stepped up basis in the hands of the heir. A proposal would require the same value for both purposes.
Limit duration of GST trusts. A proposal would limit the life of a Generation Skipping Trust to 90 years.
Coordination of grantor trust and transfer tax rules. And finally, another proposal would cause inclusion of the assets of a grantor trust in the grantor's estate or cause there to be a gift tax if the grantor ceased being owner.

Conclusion:  There are still techniques available to reduce estate, gift and GST taxes, but they may be fleeting, so planning now is very important.

Fiscal Cliff Fallout – The New Investment Income Tax

Fiscal Cliff Fallout – The New Investment Income Tax

 

Much has been said about the level of income at which there would be tax hikes coming out of the fiscal cliff negotiations around year end.  We know President Obama had pushed for tax increases for “wealthy” individuals with income over $250,000 annually.  The Republicans (who control the House of Representatives) wanted no increase for “wealthy” individuals.  We all have read that there was a compromise and the higher tax bracket of 39.6% does not hit until income exceeds $450,000 for married couples filing jointly or $400,000 for unmarried filers.  But what appears lost in all of this is the 3.8% income tax increase on investment income for wealthy individuals. 

 

Background:  In 2010, Congress passed P.L. 111-152 to become effective 1/1/13.  This law imposes a tax on investment income at the rate of 3.8% imposed against married individuals with income over $250,000 annually or unmarried individuals with income over $200,000 annually.  The tax is imposed on the following types of income: interest, dividends, annuities, royalties, rents and business income from passive activities and businesses trading financial instruments. 

 

While the increased 4.6% (over the 35% highest bracket)  tax on income will not kick-in except for wealthy taxpayers above the $450,000 level (for married individuals), for purposes of the new investment tax, this new tax kicks-in at a much lower income level - $250,000 (for married individuals).