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).