3.8% surtax... Real number scenarios (Part 2)

As promised, here are some real-world examples of when the new 3.8% surtax would apply to a tax return, and some examples of when it wouldn't apply at all.  I know I don't have to say this, but each tax situation is unique.  It will take some work to figure out if you are subject to the tax, so when we meet this summer during our mid-year planning sessions, we'll address the tax with you.  If you did not opt for a tax preparation package which offered mid-year meetings, you can always schedule an appointment for an advisory session.

Examples for your consideration:

1. A married couple filing jointly has $400,000 of adjusted gross income (or AGI):

• $240,000 of wages.  
• $160,000 of the income is composed of interest, dividends, and net gains from the sale of raw land.

Because they have $150,000 of investment income above the $250,000 threshold, they would owe an extra 3.8% on the $150,000 over the limit, or $5,700.

2.  A retired couple filing jointly has no wages, but does have taxable IRA payouts of $100,000; pension and social security payments totaling $60,000; dividends and taxable interest of $40,000; and $40,000 from the sale of two investments.  Total income = $240,000.

They owe nothing, because their income is below that $250,000 threshold.

3.  A single tax payer earns $60,000 of wages and nets a $180,000 windfall from the sale of a long-held investment. Total income = $240,000.

Because she has $40,000 of investment income above the $200,000 threshold she will owe $1,520 in tax ($40,000 x 3.8%).

4.  A single taxpayer has an income of $220,000, but it all comes from Social Security benefits and pension and regular IRA payouts.  

None of this income is subject to the 3.8% tax.

How would this 3.8% tax apply to the sale of a principal residence?

1.  It would apply if the net gain on the sale exceeds the $500,000 exclusion for joint filers (250,000 for single) and their income exceeds the adjusted gross income threshold.

So, if I have an adjusted gross income above the threshold that is then reduced by a large itemized deduction like medical expense or a charitable gift, what happens?

The tax applies.  AGI is calculated BEFORE itemized deductions.

What about trusts and estates?

Yep.

This tax applies to net investment income of more than $12,000 that isn't paid out to beneficiaries.

I hope this has been helpful.  Please let us know if you have specific questions on anything indicated here.  As we find more insightful analysis of the new law, we'll make sure to pass it along to you via our newsletter, this blog, our website and our Facebook page.

(These examples were adapted from The Wall Street Journal... for the education and good of all humanity.)