BerryDunn Offers Five Tips On New 3.8% Personal Investment Tax

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The new Net Investment Income Tax (NIIT) will take effect January 1, 2013. New England accounting firm, BerryDunn, has put together the following tips for understanding this new tax.

The Net Investment Income Tax (NIIT), which is part of the new health care law, affects income realized in 2013.

On January 1 a new 3.8% investment tax goes into effect that could impact certain higher-income earners. The Net Investment Income Tax (NIIT), which is part of the new health care law, affects income realized in 2013. BerryDunn, a New England accounting firm, is working with clients to help individuals and families understand how the tax affects them.

Following are five tips for tax planning strategy.

Tip #1 BerryDunn advises managing income levels around the thresholds of $200,000 for single filers, $250,000 for joint filers in order to reduce modified adjusted gross income. For example, consider the impact of large withdrawals from retirement accounts, capital gains transactions and employment bonuses in 2013.

Net investment income can be reduced through changes in investment products such as moving to tax exempt bonds, tax deferred annuities or life insurance. Other tax planning strategies include Roth IRA’s, capital gain harvesting and installment sales.

Tip #2 The tax is assessed only on investment income that is realized in 2013 -- not on each year’s appreciation on assets. “You will trigger the 3.8% tax only when you sell an appreciated asset, assuming your modified adjusted gross income is above the threshold,” BerryDunn Principal Sno Barry says.
Tip #3 A common misunderstanding about the new tax is that it applies to anyone involved in a major real estate transaction. “This is a capital gains tax not a real estate tax,” Barry says. “The tax applies to individuals with net investment income and modified adjusted gross income above $200,000 for single filers or $250,000 for those filing jointly.”

Furthermore, if the gain is from the sale of a personal residence there is a capital gain exclusion of $250,000 (single filers) and $500,000 (joint filers). Anything above that and the 3.8% tax may apply.

Tip #4 BerryDunn also alerts clients to the possible impact of one-time transactions. “If you generally have income below the threshold amount,” Barry says, “you should be aware that the tax might apply in years when you realize a large capital gain from selling stock or other investment property.”

Net investment income includes interest, dividends, royalty, annuity, and net rental income. It also includes net income from a business in which an individual does not materially participate, as well as capital gains and other net gains from sale of property.

Tip #5 Business profits will not be taxed as net investment income. However, partnership and S-corp income will result in gross income that contributes to modified gross income. That means other sources of investment income could be subject to the 3.8% tax.

BerryDunn has offices in Bangor and Portland, ME, Boston, MA, and Manchester, NH. For information about the 3.8% tax, visit

BerryDunn is a firm of CPAs and consultants providing financial and business expertise to organizations in New England and across the country.

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