Prepare for Higher Capital Gains Tax Part 2/2

PART 2: EXAMPLES (Source: Wall Street Journal)

EXAMPLE 1 

A married couple filing jointly has $400,000 of adjusted gross income — $240,000 of wages plus $160,000 of investment income 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% of that amount, or $5,700, in tax. 

EXAMPLE 2 

A retired couple filing jointly has no wages but does have taxable IRA payouts of $100,000, plus pension and Social Security payments totaling $60,000. They also have dividends and taxable interest of $40,000, plus $40,000 from the sale of two investments. They owe nothing, because their income is below the $250,000 threshold.

EXAMPLE 3

A single taxpayer earns $60,000 of wages but nets a windfall of $180,000 from the sale of a long-held investment. Because she has $40,000 of investment income above $200,000, she owes $1,520 of extra tax. 

EXAMPLE 4

A single taxpayer has income of $220,000, but all of it comes from Social Security benefits and pension and regular IRA payouts. None of the income is subject to the 3.8% tax. 

EXAMPLE 5

A couple bought a residence long ago for $100,000. In 2013, when they have wages of $100,000, they sell the home for $1.5 million.  After subtracting the $100,000 cost of the home and the $500,000 exclusion they have investment income of $900,000. That plus their wages puts them $750,000 over the $250,000 AGI limit, and they would owe $28,500 in extra tax. 

EXAMPLE 6 

A single person bought a house many years ago for $50,000 and sells it for $350,000 next year, after subtracting the $50,000 cost and the $250,000 exclusion, the investment income is $50,000. If this taxpayer has $150,000 or less of other income, no extra tax will be owed. But if he earns $150,000 of wages and has $20,000 of dividends and interest, then he would owe extra tax on $20,000, or $760. 

The new tax imposition will greatly affect your final income.  Experts are advising all home owners to make a move this year to avoid the new 3.8% surtax. If you are planning to sell in the future, it's better to do it this year!!!

Prepare for Higher Capital Gains Tax Part 1

Starting January 1, 2013, the government will impose a new 3.8% surtax on some investment income. The new investment tax will help generate an estimated $210 Billion that will help fund President Obama's health care and Medicare overhaul plans. 

The new tax levy applies to married couples with adjusted gross income of more than $250,000 and single filers with adjusted gross income above $200,000.

Adjusted Gross Income or AGI includes interest, dividends, capital gains, wages and retirement income plus results from partnerships and small businesses.

Investment Income applies to dividends, rents (less expenses), royalties, interest, except municipal-bond interest, short-and long term capital gains (less capital losses); the taxable portion of annuity payments; income from the sale of a principal above the $250,000/$500,000

exclusion; a net gain from the sale of a second home; and passive income from a real estate and investments - if a taxpayer does not participate, such as a partnership.  (Source: www.smartmoney.com)

Watch out for Part 2 for sample computations of the new 3.8% surtax on some investment income on different scenarios.