Discussion:3.8% medicare tax - "net investment income" capital loss carry forwards?

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Discussion Forum Index --> Advanced Tax Questions --> 3.8% medicare tax - "net investment income" capital loss carry forwards?


Discussion Forum Index --> Tax Questions --> 3.8% medicare tax - "net investment income" capital loss carry forwards?

Murphyqu03 (talk|edits) said:

8 January 2013
I briefly searched the site and couldn't find anything.

I know there was some question as to the wording of the statute regarding whether the 3.8% net investment income tax would include loss carry forwards in the calculation or not.

Does anyone know if there has been some clarity on this?

Thank you very much!

Ckenefick (talk|edits) said:

8 January 2013
What about net passive rental income in Year1...fully taxed @ 3.8%, but a net passive rental loss in Year2...and no other investment income in either year? Can we carryback the Year2 loss to Year1 for purposes of the 3.8% Medicare tax? Or what if we have an NOL in Year2...can we recoup some or all of the 3.8% additional Medicare tax we paid in Year1?

Please, someone read all 144 pages of the proposed regulations surrounding this *single* tax and let us know...

Harry Boscoe (talk|edits) said:

8 January 2013
Murph, I'm sure almost without looking that capital loss carryforwards will reduce income by the amount they are allowed to reduce income. Like, nothing special, your Schedule D will use up as much capital loss carryforward as it should in arriving at taxable capital gains. If you could point us to the "question as to the wording" I'm sure we would answer more definitively.

Murphyqu03 (talk|edits) said:

8 January 2013
Thanks for the replies. The language I'm referring to is in section 1411(c)(iii), regarding gains:

"net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property other than property held in a trade or business not described in paragraph "

I guess I am not positive whether the "to the extent taken into account in computing taxable income" is there to mean 1. include carry forward losses, because that's what you do to calculate your taxable income, 2. don't include things like the sale of your house (under the threshold), because that's not included in your taxabe income, or 3. both.

1. and 2. are kind of fundamentally different issues, I think.

Also, throwing a little kink into my thoughts: the statute clearly states "net investment income for the taxable year..." which could (in my opinion) possibly interpreted to include things like the sale of th house example above, and not carry forward losses. I'm not saying it's clearly one way or the other, I'm just saying I'm not positive which way it would be just from reading the statute!

"a) In general Except as provided in subsection (e)— (1) Application to individuals In the case of an individual, there is hereby imposed (in addition to any other tax imposed by this subtitle) for each taxable year a tax equal to 3.8 percent of the lesser of— (A) net investment income for such taxable year"

Harry Boscoe (talk|edits) said:

8 January 2013
Anyone who's really into detail would have already noticed that the IRS's online FAQ on the 3.8% tax on net investment income was "Last Reviewed or Updated: 12-дек-2012".

Is the IRS outsourcing the review and updating of its online material to Russia?

Murphyqu03 (talk|edits) said:

8 January 2013
On the IRS website:

http://www.irs.gov/uac/Newsroom/Net-Investment-Income-Tax-FAQs

It says to take capital losses into consideration. Again, though, does this mean only current year or also prio years?

I guess I would assume we're supposed to include the carry forward losses in the calculations, but the top left paragraphs of page 11, here: http://www.gpo.gov/fdsys/pkg/FR-2012-12-05/pdf/2012-29238.pdf

discusses section 165, but I still don't know if it is clear or not...

TOrahaCPA (talk|edits) said:

8 January 2013
The proposed regs have a few examples:

from §1.1411-4(h)

Example (1). Calculation of net gain. (i) In Year 1, A, an unmarried individual, realizes a capital loss of $40,000 on the sale of P stock and realizes a capital gain of $10,000 on the sale of Q stock, resulting in a net capital loss of $30,000. Both P and Q are C corporations. A has no other capital gain or capital loss in Year 1. In addition, A receives wages of $300,000 and earns $5,000 of gross income from interest. For income tax purposes, under section 1211(b), A may use $3,000 of the net capital loss against other income. Under section 1212(b)(1), the remaining $27,000 is a capital loss carryover. For purposes of determining A's Year 1 net gain under paragraph (a)(1)(iii) of this section, A's gain of $10,000 on the sale of the Q stock is reduced by A's loss of $40,000 on the sale of the P stock. However, because net gain may not be less than zero, A may not reduce net investment income by the $3,000 of the excess of capital losses over capital gains allowed for income tax purposes under section 1211(b).

(ii) In Year 2, A has a capital gain of $30,000 on the sale of Y stock. Y is a C corporation. A has no other capital gain or capital loss in Year 2. For income tax purposes, A may reduce the $30,000 gain by the Year 1 section 1212(b) $27,000 capital loss carryover. For purposes of determining A's Year 2 net gain under paragraph (a)(1)(iii) of this section, A's $30,000 gain may also be reduced by the $27,000 capital loss carryover from Year 1. Therefore, in Year 2, A has $3,000 of net gain for purposes of paragraph (a)(1)(iii) of this section.

Example (2). Calculation of net gain. The facts are the same as in Example 1, except that in Year 1, A also realizes a gain of $20,000 on the sale of Rental Property D, all of which is treated as ordinary income under section 1250. For income tax purposes, under section 1211(b), A may use $3,000 of the net capital loss against other income. Under section 1212(b)(1) the remaining $27,000 is a capital loss carryover. For purposes of determining A's net gain under paragraph (a)(1)(iii) of this section, A's gain of $10,000 on the sale of the Q stock is reduced by A's loss of $40,000 on the sale of the P stock. A's $20,000 gain on the sale of Rental Property D is reduced to the extent of the $3,000 loss allowed under section 1211(b). Therefore, A's net gain for Year 1 is $17,000 ($20,000 gain treated as ordinary income on the sale of Rental Property D reduced by $3,000 loss allowed under section 1211).

Murphyqu03 (talk|edits) said:

8 January 2013
HB - HA!

Murphyqu03 (talk|edits) said:

8 January 2013
TOrahaCPA - I guess that seems to be pretty spot on. good find! Thanks!

Murphyqu03 (talk|edits) said:

8 January 2013
TOrahaCPA - I guess that seems to be pretty spot on. good find! Thanks!

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