NET INVESTMENT INCOME

Includes:

• Interest
• Dividends
• Annuity Distributions
• Rents
• Royalties
• Income derived from passive activity
• Net capital gain derived from the disposition of property

Does NOT Include:

• Salary, wages or bonuses
• Distributions from IRAs or qualified plans
• Any income taken into account for self-employment tax purposes
• Gain on the sale of an active interest in a partnership or S-Corporation
• Items which are otherwise excluded or exempt from income under the income tax law, such as interest from tax-exempt bonds, capital gain excluded under IRC 121, and veterans benefits

Tax Rate increases to 20% for taxpayers with income above certain threshold amounts.

For taxpayers above threshold amounts for 3.8% Net Investment Income Tax (NIIT), their capital gains rate will actually be 23.8%.

Maximum tax rates for Capital Gains will remain at 15% for taxpayers with lower incomes.

Qualified dividend treatment is made permanent.

The ?0%? Capital Gains rate continues in the 15% income tax bracket.

10%, 15%, 25% and 28% rates from Bush Administration tax cuts were made permanent.

33% and 35% rates were made permanent up to certain threshold levels ?

            Single Taxpayers                                                                             $400,000

            Head of Households                                                                      $425,000

            Married Filing Jointly or Surviving Spouse                                    $450,000

            Married Filing Separately                                                                 $225,000

Amounts of income above these threshold levels are taxed at 39.6%.

Threshold amounts are adjusted for inflation.

A spousal beneficiary must be married to the account owner at the time of the account owner?s death and he or she must be named on the beneficiary form (or inherit directly through the document default provisions). A spousal beneficiary has a number of unique options.

Split the inherited account if necessary.

A spousal beneficiary can take advantage of the special spousal rules if they are the sole beneficiary of an IRA account. If other beneficiaries have been named, the spouse can still take advantage of these special provisions by transferring their portion of the inherited IRA to a separate account by December 31st of the year following the year of the IRA owner?s death.

Will a spousal beneficiary need money prior to 59 ½?

If a spousal beneficiary needs money from the IRA prior to age 59 ½, they will likely want to remain a beneficiary of the inherited account. Death is an exception to the 10% early distribution penalty, so by staying as a beneficiary they?ll avoid paying the 10% penalty. The account should be retitled as a properly titled inherited IRA. A spouse that remains a beneficiary does not need to take RMDs from the account until the year the deceased spouse would have turned 70 ½.

Transfer the inherited IRA into a spousal beneficiary?s account.

A spousal beneficiary should generally roll the inherited IRA into their own name. Once a younger spousal beneficiary reaches age 59 ½, there?s no advantage to remaining a beneficiary, and a spousal rollover should be done. There is no deadline for this transaction. NO other beneficiary has this option. By doing this rollover, a surviving spouse ensures that their own beneficiaries will be able to stretch distributions over their own life expectancy.

Name new beneficiaries.

A surviving spouse should name their own beneficiaries. If no beneficiaries have been named and the surviving spouse dies, the remaining assets will pass according to the default provisions in the custodial document. This is frequently the estate of the now deceased spouse, which could eliminate the stretch option for beneficiaries or add unnecessary time and expense by tying the assets up in probate.

Consider a disclaimer.

Before taking any action regarding an inherited IRA, a surviving spouse should evaluate whether a full or partial disclaimer would be beneficial. Using a disclaimer, some or all of the inherited IRA can be passed to contingent beneficiaries, potentially extending the stretch IRA and reducing the future impact of estate taxes.

What is considered investment income?

The health care laws implement a 3.8% surtax on net investment income starting in 2013. Below is a list of what is and is not considered investment income. 

Investment Income: Interest, dividends, capital gains (long and short), annuities (not those in IRAs or company plans), royalty income, passive rental income, other passive activity income.

NOT Investment Income: Wages and self-employment income, active trade/business income, distributions from IRAs, Roth IRAs and company plans, excluded gain from sale of a principal residence, municipal bond interest, proceeds of life insurance policies, veterans? benefits, Social Security benefits, gains on sale of an active interest in a partnership or S corporation © 2013 Ed Slott and Company, LLC

Step 1. Identify the surtax income thresholds.

The first step is to know the MAGI (modified adjusted gross income) thresholds to avoid the 3.8% surtax on net investment income. They are as follows: Married Filing Jointly ($250,000); Individuals ($200,000); Married Filing Separately ($125,000); Trusts and Estates (approximately $12,000). Trusts and estates are hit particularly hard with the surtax kicking in at a much lower income level.

Step 2. Look at TAXABLE income.

Taxable income from all sources can push taxpayers over the MAGI threshold and cause their investment income to be subject to the 3.8% surtax. Income tax-free Roth distributions will NOT affect MAGI.

Step 3. Understand how much will be taxed.

The 3.8% surtax is imposed on the lesser of (1) net investment income or (2) the amount of MAGI over the certain income threshold. Taxpayers with income below those MAGI levels will NOT be subject to this tax.

Step 4. Know other health care tax provisions coming in 2013.

The 3.8% surtax gets the attention, but there is also an additional 0.9% Medicare tax on wages and self-employment income over the MAGI thresholds. Also, medical expenses must exceed 10% of AGI (up from 7.5%) to be deductible (if age 65 or older, this provision is effective in 2017). That 10% also applies to the medical expense exception to the 10% penalty on early IRA or plan withdrawals.

Step 5. Discuss these tax planning points.

You need to know that while IRA and plan distributions are exempt from the surtax, taxable distributions from these accounts can push income over MAGI thresholds. Roth conversions can be a valuable tool to eliminate future taxable income, especially for taxpayers with significant investment income or a discretionary trust as their IRA beneficiary. Conversions could push you above your thresholds in the short-term though. Salary deferrals (401(k)s for example) can reduce MAGI for the 3.8% surtax but NOT for the 0.9% additional Medicare tax.

The FTB receives information from the IRS, EDD, BOE, financial institutions, cities, and other businesses, and matches this information against its tax records.

In July, the FTB announced they would be contacting 90,000 businesses that had not yet filed a 2011 tax return and that were presumed to have a filing requirement.

Businesses contacted by the FTB will have 30 days to file a tax return or show why there is no filing requirement. Taxpayers who do not file tax returns or demonstrate that they are not required to file will receive a tax assessment based on income and other information that was reported to the FTB.

Businesses who receive such a notice from the FTB can request more time to respond, gain more information, and request tax forms through the FTB's website, or by calling: In 2012, the FTB collected approximately $23 million from businesses that had initially failed to file a tax return.