The 3.8% tax on net investment income will be imposed on the lesser of your net investment income or the amount by which you income exceeds the "threshold amount" for the year. For 2013 the threshold for married filing jointly is $250,000, $125,000 if you are married filing separately, and $200,000 for everyone else.
Although the IRS issued more than 100 pages of regulations to define "net investment income" the term basically includes interest, dividends, annuities, rents, royalties and capital gains. Interest on tax-exempt bonds and distributions from qualified retirement plans are not included and any gain excludable from income on the sale of your primary residence is not included.
This new tax makes it even more important than ever to discuss the tax implications of major changes to your investment plans with me before taking action so that you are not surprised by an unexpected tax bill come April 15th.
The 0.9% tax on earned income applies to wages and self-employment income. The income thresholds are the same as the tax on net investment income - $250,000 for couples filing jointly, $125,000 for married but filing separately and $200,000 for other filers. The surtax applies only to the employee's portion of the Medicare tax. There is no increase to the employer-paid portion, but employers are required to withhold the surtax once an employee's wages exceed $200,000 in a calendar year.
Caution - If filing jointly, each spouse could earn less than the $200,000 threshold and have no extra withholding on their wages during the year but have combined wages of more than $250,000 on their tax return and have to pay the surtax at tax time. On the other hand, if one spouse's wages are over $200,000 and the additional tax is withheld by their employer but combined income is less than $250,000 the extra surtax will come back as a credit on their tax return.
If you have questions about whether the 0.9% surtax will apply to you, please give me a call.