Q. What are the ways to avoid the new investment income tax?
A. If you are married filing jointly with more than $250K income (or $200K for singles), your investment income (e.g. dividends, interests, and capital gains) are subject to a new 3.80% tax.
You can try the following strategies to minimize the hit
Minimize your AGI (adjusted gross income)
There are many ways to reduce AGI: deductible contributions to tax-favored retirement plans such as 401(k)s, individual retirement accounts or pensions; a charitable contribution of IRA assets by taxpayers 70½ or older; moving expenses; deferred compensation; and capital losses up to $3,000 deducted against ordinary income.
Taxable payments from pension plans, regular IRAs and Social Security aren’t subject to the 3.8% tax. But such income raises AGI in a way that can expose other investment income to the tax.
Time your income
For example, postpone bonus to next year, harvest losses, hold investment gains, etc.
Understand what’s exempt
Life-insurance proceeds, gifts and inheritances are also not subject to the tax, nor are appreciated assets donated to charity.
Use estate planning to avoid RMDs
Required Minimum Distribution (RMD) payments from Traditional IRAs and 401(k)s can subject investment income to the 3.8% investment tax. However, there are estate planning and financial planning strategies that can avoid RMDs. Avoiding RMDs can circumvent the domino effect of the new higher marginal income tax rates, new Medicare tax and new investment tax.
Utilize 529 plan
Withdrawals from 529s, if used for higher education expenses, are not classified as income, which makes it an excellent tax shelter. Also, 529s are neither subject to RMDs nor are they subject to estate taxes.
A. If you are married filing jointly with more than $250K income (or $200K for singles), your investment income (e.g. dividends, interests, and capital gains) are subject to a new 3.80% tax.
You can try the following strategies to minimize the hit
Minimize your AGI (adjusted gross income)
There are many ways to reduce AGI: deductible contributions to tax-favored retirement plans such as 401(k)s, individual retirement accounts or pensions; a charitable contribution of IRA assets by taxpayers 70½ or older; moving expenses; deferred compensation; and capital losses up to $3,000 deducted against ordinary income.
Taxable payments from pension plans, regular IRAs and Social Security aren’t subject to the 3.8% tax. But such income raises AGI in a way that can expose other investment income to the tax.
Time your income
For example, postpone bonus to next year, harvest losses, hold investment gains, etc.
Understand what’s exempt
Life-insurance proceeds, gifts and inheritances are also not subject to the tax, nor are appreciated assets donated to charity.
Use estate planning to avoid RMDs
Required Minimum Distribution (RMD) payments from Traditional IRAs and 401(k)s can subject investment income to the 3.8% investment tax. However, there are estate planning and financial planning strategies that can avoid RMDs. Avoiding RMDs can circumvent the domino effect of the new higher marginal income tax rates, new Medicare tax and new investment tax.
Utilize 529 plan
Withdrawals from 529s, if used for higher education expenses, are not classified as income, which makes it an excellent tax shelter. Also, 529s are neither subject to RMDs nor are they subject to estate taxes.
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