The Skinny on the Net Investment Income Tax
The Skinny on the Net Investment Income Tax – The Net Investment Income Tax is a 3.8% surtax imposed on capital gains, interest, dividends, gains from the sale of property and passive business income such as rents and royalties. It applies to taxpayers with a modified adjusted gross income in excess of $200,000 ($250,000 for a married couple) and is imposed on the total amount of a person’s net investment income or the amount by which that income exceeds the income threshold, whichever is less. Although the Net Investment Income Tax took effect on January 1, 2013, the IRS did not issue the regulations governing the tax until sometime in November. Because of this time lag, taxpayers who are subject this new passive income tax are just getting a handle on how it will affect them and what tax planning strategies may help to avoid some of the new tax burden.
The following are tax planning strategies that could reduce the amount of Net Investment Income Tax owed:
- Gift appreciated property to a charity.
- When you gift an appreciated asset, you can deduct its full appreciated value but it will not be subjected to the Net Investment Income Tax.
- Transfer appreciated property to a relative with an income below the threshold.
- The relative whose income is below the threshold can sell the appreciated asset and the gain will not be subjected to the Net Investment Income Tax.
- Invest in tax exempt assets.
- The interest and dividend payments from tax exempt investments such as certain state and municipal bonds are not subjected to the Net Investment Income Tax.
- Sell an appreciated asset on the installment plan.
- When an appreciated asset is sold on the installment plan, only that portion of the sale that is actually received is subjected to the Net Investment Income Tax.
- Loan money to a business that you own.
- Although most interest payments are subjected to the Net Investment Income Tax, this is not true for interest received from a loan made to a business that you own.
- Rent property to a business that you own.
- Although most rent payments are subjected to the Net Investment Income Tax, this is not true for rents received from a business that you own, even if you are not an active participant in the business.
As in all matters involving income tax, tax planning as it relates to the Net Investment Income Tax can result in a significant savings of tax dollars. Now that the IRS has issued the guidelines for this new tax, care should be taken to examine those guidelines and apply them to areas of potential tax savings.
If you have tax questions or a tax debt you are unable to pay, our tax settlement professionals are happy to discuss your tax resolution options free of charge. For more information about our tax settlement services, visit us today at www.professionaltaxresolution.com. Call us at 877.889.6527 or email us at info@protaxres.com to receive a free, no obligation consultation.
