Example 2: B and C, a married couple applying together, sell their principal residence, which they have owned and lived in for 10 years, for $1.3 million. The cost base of B and C in the house is $700,000. The realized gain of B and C from the sale is $600,000. The recognized earnings, which are subject to regular income tax, are $100,000 ($600,000 of realized profit less the exclusion of $500,000 in section 121). B and C have an additional net investment income of $125,000, bringing B and C`s total net capital income to $225,000. The amended gross adjusted income of B&C is $300,000 and exceeds the $250,000 threshold of $50,000. B and C are subject to an NIIT of $225,000 (B`s net income) or $50,000 (the amount of B and C`s amended adjusted gross income exceeds the $250,000 threshold for joint declaration of marriage). B and C owe a net capital gains tax of $1,900 ($50,000 x 3.8%). Net capital gains, in particular, do not include items such as wages, unemployment benefits, operating income from non-passive transactions, Social Security benefits, alimony, tax-exempt interest, self-employment income, Alaska Permanent Fund dividends, and distributions from certain eligible pension plans. However, these items may be subject to the 0.9% Additional Medicare Tax. Just because you`re a higher income earnings earns large capital gains doesn`t mean you`re destined to pay huge amounts of NIIT. You can manage your net capital gains tax using strategies to reduce both the amount of net capital gain reported and the modified adjusted gross income.
However, Chris Schiffer of wealth enhancement group in Basking Ridge, New Jersey, warns that “the control tail should not stir the investment dog.” The Net Capital Gains Tax (NIIT), created under the Health Care and Education Reconciliation Act to fund health care reform in 2010, is an additional 3.8% tax that generally only applies to high-income individuals with significant capital gains. The tax thresholds for net capital gains are based on the status of the tax return and income (defined by the modified adjusted gross profit). As an investor, you may be liable for an additional 3.8% tax called Net Capital Gains Tax (NIIT). But you only owe it if you have capital gains and your modified adjusted gross income (MAGI) exceeds a certain amount. The taxpayer, a single applicant, has a salary of $180,000. The taxpayer also received $90,000 from an interest in a passive partnership, which is considered a net return on capital. The taxpayer`s amended adjusted gross income is $270,000. Tax-exempt interest is not included in the result of the investment. Profits from the sale of a personal residence are also avoided if the profit is excluded from income for income tax purposes. Profits from real estate held in a business or business are also excluded. If a person has investment income, they may be subject to net capital gains tax.
With effect from 1. In January 2013, individual taxpayers are subject to a net capital gains tax of 3.8% on the lower portion of their net capital gain or on the amount by which their amended adjusted gross income exceeds the legislated threshold based on their reporting status. What about the standard deduction or the single deduction? You calculate your adjusted gross income, which can be found on Form 1040, line 11, and then subtract the standard deduction of $12,400 for a single applicant or $24,800 for married applicants for 2020 or individual deductions on Form 1040, line 12 to match your taxable income on Form 1040, line 15. Example 3: D, an individual applicant, earns a salary of $45,000 and sells her principal residence, which she has owned and occupied for 10 years, for $1 million. The cost base of D in the house is $600,000. D`s gain from the sale is $400,000. The recognized earnings, which are subject to regular income tax, are $150,000 ($400,000 of realized profit less the exclusion of $250,000 under section 121), which is also net investment income. D`s amended adjusted gross income is $195,000. Since D`s modified adjusted gross income is below the $200,000 threshold, D has no net capital gains tax.
“Capital expenditures include, but are not limited to: ● Capital interest charges● Investment advisory and brokerage fees● Expenses related to rental and royalty income● Tax preparation fees● Fiduciary fees (in the case of an estate or trust) and state and local income taxes. » www.irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax Adjusted Gross Income – Standard Deduction or Individual Deduction = to You take your adjusted gross income (Form 1040, line 11), then you add certain deductions and exclusions to receive your amended adjusted gross income. .