taxes

Important Changes for Year-End Tax Planning

With less than a month left in 2013, BMO Private Bank encourages Americans to turn their attention to tax planning. This is especially important given an increasingly complex tax code and recent changes such as the addition of the new Net Investment Income Tax (NIIT).

“It’s important for taxpayers to educate themselves about changes in the tax code, and with the addition of the Net Investment Income Tax this year, there’s an even greater need for advanced planning,” said Jason Miller, Director, Financial Planning, BMO Private Bank. “That’s why it’s always helpful to consult with a financial and tax professional before the end of the year.  Waiting until the New Year to start thinking about taxes is often too late.”

The NIIT adds a 3.8% tax on investment income if one’s Adjusted Gross Income (AGI) exceeds $200,000 for a single taxpayer or $250,000 for a couple filing jointly. One way to determine if you might be subject to this tax is to look at last year’s income tax return and have a general idea if this year’s income would be significantly different.  The tax is on net investment income.

The income subject to this tax would include interest and dividends, distributions from non-qualified annuities, income from rental real estate, S-Corporations or partnerships, and net capital gains from the sale of investments.

Deductions that could reduce or help eliminate NIIT include investment interest, state income taxes on investment income, and investment management fees.

Miller noted that one misconception regarding the NIIT is that all home sales would be subject to this new tax. For a primary residence, a taxpayer can exclude $250,000 of gain from the sale of a home ($500,000 on a joint return) if the home was used as a primary residence for two of the last five years. Only the gain in excess of this exclusion would be subject to the new 3.8% tax.

For more information on tax issues or to find out more about how to work with wealth and tax professionals, click here.

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