IRS aims to clarify investment income tax under healthcare law

WASHINGTON Mon Dec 3, 2012 6:14pm EST

WASHINGTON (Reuters) - The Internal Revenue Service has released new rules for investment income taxes on capital gains and dividends earned by high-income individuals that passed Congress as part of the 2010 healthcare reform law.

The 3.8 percent surtax on investment income, meant to help pay for healthcare, goes into effect in 2013. It is the first surtax to be applied to capital gains and dividend income.

The tax affects only individuals with more than $200,000 in modified adjusted gross income (MAGI), and married couples filing jointly with more than $250,000 of MAGI.

The tax applies to a broad range of investment securities ranging from stocks and bonds to commodity securities and specialized derivatives.

The 159 pages of rules spell out when the tax applies to trusts and annuities, as well as to individual securities traders.

Released late on Friday, the new regulations include a 0.9 percent healthcare tax on wages for high-income individuals.

Both sets of rules will be published on Wednesday in the Federal Register.

The proposed rules are effective starting January 1. Before making the rules final, the IRS will take public comments and hold hearings in April.

Together, the two taxes are estimated to raise $317.7 billion over 10 years, according to a Joint Committee on Taxation analysis released in June.

To illustrate when the tax applies, the IRS offered an example of a taxpayer filing as a single individual who makes $180,000 in wage income plus $90,000 from investment income. The individual's modified adjusted gross income is $270,000.

The 3.8 percent tax applies to the $70,000, and the individual would pay $2,660 in surtaxes, the IRS said.

The IRS plans to release a new form for taxpayers to fill out for this tax when filing 2013 returns.

The new rules leave some questions unanswered, tax experts said. It was unclear how rental income will be treated under the new rules, said Michael Grace, managing director at Milbank, Tweed, Hadley & McCloy LLP law firm in Washington.

"The proposed regulations surely will increase tax compliance burdens for individuals," said Grace, a former IRS official. "There's clearly some drafting left to be done."

(Reporting by Patrick Temple-West; Editing by Howard Goller and Jan Paschal)

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Comments (145)
TnMan wrote:
Wow, 317 billion over ten years! That is 32 billion a year. Only over one trillion a year to go.

Dec 03, 2012 6:40pm EST  --  Report as abuse
MelAnosis wrote:
In my business I know of 4 people in the early 60′s who have sold and will collect Social Security. They feared the capital gains increases would wipe out income they made if they stayed put for 3-4 more years ad they had planned. So next year, the government will be paying them instead of collecting income tax from them. That should be good for the deficit and the National debt. What Obama and his people don’t understand is that people’s behavior will change when you change the rules. He seems not to understand this simple concept. Apparently revenue dropped in England after the taxes were dramatically raised on the high earners. It’s fine with me also….since I have the luxury of working less next near to avoid taxes. Unfortunately the younger folks and the poorer folks don’t. So who gains from this? Ask the great Messiah in the White House.

Dec 03, 2012 6:47pm EST  --  Report as abuse
rowley wrote:
time to secede or be enslaved

Dec 03, 2012 6:52pm EST  --  Report as abuse
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