15% v. 20% max cap gain tax rate?

"Due to new fiscal cliff legislation, capital gains & dividend tax rates are increasing from 15% to 20% for singles earning over $400,000 [...]. Additional changes include:

"Individuals making in the $36,250 to $400,000 range will see their capital gains continue to be taxed at a 15% tax rate.

"There will also be an additional 3.8% investment income tax applied to singles earning over $200k [...]. The purpose of this new tax is to help fund Medicare."

Am I correct that "earning" refers __only__ to earned income per se? Or does it include other income (please specify)?

In particular, does it mean that the max cap gains tax rate continues to be

15% for a retired person who has __no__ earned income per se, even though she might have more than $200K or $400K in taxable income from other sources, namely SSA, interest, dividends and cap gains?

===============No.

On wages over $200k (for singles; $250k for married), the tax is 0.9%. The investment tax applies to interest, dividends, royalties, and rents.

Whoever wrote "earning" there was wrong.

[....] [....] [.....]

Well, of course the 15% or 20% cap gains tax rate __applies__ to cap gains (and qualified dividends); and of course the 3.8% investment income tax rate __applies__ to investment income (however that is defined). No one was talking about the additional Medicare tax at 0.9% (aka "Obamacare tax").

But I was asking about the __criteria__ that trigger the application of the

20% cap gains tax rate and 3.8% investment income tax rate.

Specifically, I asked if "earnings" [sic] refers __only__ to earned income (in this case), or if it includes other income.

Perhaps I should have asked: is "earned income" truly the trigger, assuming that "earnings" does indeed refer only to "earned income" in general. (Does it?)

"D. Stussy" wrote:

You might be right.

I did find information in IRS Pub 17 that indicates the 20% tax rate on (some?) qualified dividends is triggered by __taxable__ income, not just "earnings" (if that does indeed mean "earned income").

More correctly, "on any amount [of qualified dividends] that otherwise would be taxed at a 39.6% rate", which is over $400K for singles.

Similarly for cap gains. Specifically, "if your net capital gain is from ... other gain and the regular tax rate that would apply is 39.6%". "Other gain" is cap gain other than from collectibles, qualified small business stock and unrecaptured sec 1250 gain.

The facts for NIIT (net investment income tax) is less clear. Pub 17 refers to Form 1040 Line 60 instructions and Form 8960. But the 2013 Form 1040 instructions are online yet, and neither is Form 8960.

However, a Google search turned up an IRS FAQ webpage that indicates the trigger is based on a modified AGI; again, not "earnings" as I understand the term.

I think that disposes of my original question.

I still would like to know: does the term "earnings" refers only to "earned income" in general?

(See Pub 17 for the definition of "earned income".)

I don't think you'll find a definition of that word in the Code. I use the word for situations other than earned income, e.g., earnings from an investment account.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

[...]

To your last question: no.

The original author you quote also referred to "making" a certain amount of money, so in his context "making" and "earning" money seem to be synonymous with "generating income". I imagine the author was just trying to mix up vocabulary to avoid repetition, rather than use more technically correct tax terms.

As you have said, neither the new NII tax nor the new higher capital gains rate have anything to do with how much income is due to employment (wage, salary, self-employment, etc). They are based on AGI and/or taxable income, two very different items that unfortunately are often used interchangeably in the popular press when not referred to by name, although they of course can be vastly different numbers.

"Earned income" (from employment) does not by itself trigger any special income tax rate treatment compared to other types of income (such as qualified dividends and capital gains), although of course it does trigger Social Security and Medicare tax. It is also the basis (limitation) of certain credits (EIC, child/dependent care, additional child tax credit), certain adjustments to gross income (pre-tax retirement, self-employed health insurance), and Roth IRA contributions. Even this statement probably has a hundred exceptions, such as non-taxable combat pay (which is earned income, but receives a special income tax rate) and alimony (which is not earned income but does allow for IRA contributions).

Bottom line: don't rely on the non-tax-professional media to accurately describe the tax nature and attributes of various types of income.