Year-end tax planning has traditionally included tips for managing ordinary income and capital gain tax.
These long-established strategies are still effective – but now your planning also needs to include ways to manage your exposure to the net investment income tax.
This 3.8% tax applies to the lower of your net investment income or the amount by which your modified adjusted gross income exceeds $200,000 when you’re single or $250,000 when you file jointly.
Example. Say you’re filing jointly for 2015. Your net investment income for the year is $25,000 and your modified adjusted gross income is $300,000. The tax is $950 (3.8% of $25,000).
Although the term “net investment income” covers most investment income – including capital gains, interest, royalties, dividends and passive income – other items such as distributions from IRAs and qualified plans and active business income are excluded. Be aware the excluded items may still increase your modified adjusted gross income and bring the net investment income tax into play.
Here are planning opportunities to consider before the end of the year to reduce the effect of the net investment income tax.
* Harvest capital losses from securities transactions and use them to offset capital gains.
* Turn a passive activity into an active business by increasing the hours you spend participating in the activity or possibly paying yourself a guaranteed payment.
* Invest in tax-free municipal bonds or municipal bond funds that won’t increase your net investment income or your modified adjusted gross income.
* Sell real estate on the installment basis to spread out capital gain over several years or arrange a like-kind exchange to defer gain.
* Instead of selling appreciated property, donate it to charity and realize a charitable deduction – with no capital gain.
* When possible, defer taxable business income, including bonuses, to 2016 if you expect your income to be lower next year.
Reviewing your options for reducing the net investment income tax is only one part of comprehensive planning. Give us a call. We’ll help you factor the net investment income tax into your year-end
Tags: net investment tax
Written by: Doug Rodrigues