It really is happening.
Until this week, investors were waiting to see what the Supreme Court would do about the 3.8 percentage-point surtax on investment income, part of President Obama's health-care overhaul. The IRS hasn't yet released guidance on the new tax.
So when the court affirmed the law on Thursday, investors—and tax advisers—started scrambling.
The new tax, which Congress passed in 2010, affects the net investment income of most joint filers with adjusted gross income of more than $250,000 ($200,000 for single filers). Starting on Jan. 1, 2013, the tax rates on long-term capital gains and dividends for these earners will jump from their current historic low of 15% to 18.8%, assuming Congress extends the current law.
If, on the other hand, Congress allows the tax rates set in 2001 and 2003 to expire on Dec. 31—an unlikely scenario, according to many experts—the top rate on capital gains will rise to 23.8% and the top rate on dividends will nearly triple, to 43.4%.
Whatever the fate of the 2001-03 tax rates, advisers are telling clients to start making moves to minimize the new levy. ...
Here are answers to some basic questions about the tax:
- How does the 3.8% tax on investment income work?
- How is "investment income" defined?
- What are some examples of when the tax would and wouldn't apply?
- How would the 3.8% tax apply to the sale of a principal residence?
- What happens if a taxpayer has adjusted gross income above the threshold that is then reduced by a large itemized deduction—such as for medical expenses or a charitable gift?
- Does the 3.8% tax apply to trusts and estates?
- Doesn't the health-care law also have an extra payroll tax for higher earners?