03/07/2014

A New Tax Confronts High Income Taxpayers

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“The only things certain in life are death and taxes.” ~ Benjamin Franklin

Starting with the 2013 tax year, high income taxpayers will be subject to a new tax; the 3.8% Net Investment Income Tax (NIIT).  Instituted under the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, this tax is in addition to regular taxes and will be imposed on filers with Modified Adjusted Gross Income (MAGI) over certain thresholds.

The good news for investors in municipal bonds is that the interest income from a municipal bond is generally exempt from federal income tax, generally exempt from income tax in the state that issued the bond, and is excluded from the calculation of the MAGI.  The exclusion of municipal bond interest income from the MAGI calculation could help keep some taxpayers below the income thresholds at which the NIIT would otherwise be applicable.  Furthermore, interest from municipal bonds is not considered investment income for the purpose of calculating the NIIT, so it’s also exempt from the 3.8% surtax.

The Certainty of Taxes provides additional information and examples of the impact NIIT has on taxpayers.

Investors will be encountering the NIIT for the first time as they prepare their 2013 tax returns.  Consider whether tax-exempt income provided by municipal bonds would be beneficial in future investment and tax planning.

For additional information on the new tax, visit  IRS publication “Questions and Answers on the Net Investment Income Tax” or consult your professional tax advisor.

For certain investors, some dividends may be subject to federal and state income taxes, including the Alternative Minimum Tax (AMT).  For more information, please consult your professional tax advisor.

Mutual fund investing involves risk; loss of principal is possible. Investments in bonds may decline in value due to rising interest rates, a real or perceived decline in credit quality of the issuer, borrower, counterparty, or collateral, adverse tax or legislative changes, court decisions, market or economic conditions. Fund performance could be more volatile than that of funds with greater geographic diversification.

The Net Investment Income Tax (NIIT) is a 3.8% tax established by the Patient Protection and Affordable Care Act (PPACA) that applies to the lesser of (1) net investment income or (2) the excess of a taxpayer’s modified adjusted gross income (MAGI) in excess of an applicable threshold amount. For more information, please consult your professional tax advisor.

Before investing in a fund, carefully read about and consider the investment objectives, risks, charges, expenses, and other information found in the fund prospectus. The prospectus is available on this site, from your financial advisor and when you call 800-437-1020.