The American Taxpayers Relief Act, Capital Gains Tax Information Update for 2013

Capital Gains Tax
Has Increased for Some Taxpayers

To get around the so-called January 1st, 2013 'fiscal cliff', Congress passed the 2012 American Tax Relief Act (TATRA). TATRA made no modifications to the Medicare 3.8% surtax¹, which happened as scheduled on January 1, 2013. However, TATRA did increase the highest tax rate on capital gains. Effective beginning January 1, 2013, this new top tax rate on capital gains increased from 15% up to 20% on individuals having gross adjusted incomes (AGI) over $400,000 and for married couples who file jointly with gross adjusted incomes over $450,000. When combined together with a capital gains tax, the new 3.8% surtax, means that taxpayers having AGI’s above $200,000 on single persons, while above $250,000 applies to married couples are going to be looking at the new 3.8% surtax for their capital gains income. This is added on top of paying either the 15% or the 20% capital tax on gains, which depends upon the bracket of one’s federal income tax.

How do you ascertain if this 3.8% surtax is going to apply to your situation? it's quite simple if your AGI equals to or is less than those threshold amounts determined in IRC § 1411, then you won't be subject to this 3.8% surtax. However, if your AGI is higher than those threshold amounts specified, then you are going to pay this 3.8% surtax on either your AGI above the threshold specified or your investment income whichever is the lesser amount.

Taxpayer Filing status Amount of Threshold
Married filing jointly $250,000
Married filing separately $125,000
All other individual taxpayers $200,000
Trusts and Estates $11,650 (for 2012)

How do you ascertain the capital gains rate that's applicable? Your federal tax bracket that's applicable will ascertain your tax on capital gains .

Capital gains rates applicable are listed below:
Federal tax bracket of 10% or 15% equals a capital gains tax of 0
Federal tax bracket of 25%, 28%, 33% 35% or 39.5% equals a capital gains tax of 15%
Federal tax bracket of 39.6% equals a capital gains tax of 20%

3.8% surtax examples and the tax on capital gains Example #1: Mr. Jones has a $220,000 AGI ($160,000 wages plus $60,000 of investment income). Now, he has a $20,000 AGI above the $200,000 individual threshold. He will be paying the new 3.8% surtax upon the lesser amount of his income on investments (i.e. $60,000) or an amount above his $200,000 tax threshold (i.e. $20,000).

Thus, Mr. Jones must pay a 3.8% surtax upon this $20,000. In addition, since he has a $220,000 AGI, this puts him in the federal tax bracket of 25% and he will also be subject to this capital gains rate of 15%. Thus, his entire tax on capital gains is now 18.8%.

Example #2: Mr. and Mrs. Brown have a $180,000 AGI ($140,000 in wages plus $40,000 in investment income). They must pay a 3.8% surtax upon the lesser amount of their income on investments (i.e. $40,000) or any excess above this threshold (i.e. $0). And since $0 is a lesser amount, they will be paying $0 surtax. But, since they have an $180,000 AGI, it puts them in the federal tax bracket of 25% and they are going to be subject to a 15% tax on capital gains.

A 3.8% surtax is applicable to "any net investment income". Generally, "net investment income" consist of, although not limited to: dividends, interest, royalty and rental income, capital gains, income from businesses which are involved in the trading of commodities or financial instruments, non-qualified annuities, and businesses having passive income to the taxpayer. Mar 14, 2013 ✓ 

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