This Obama Era Tax that for the first time in US history placed a payroll tax on passive income is now hitting taxpayers who were never its intended targets. The problem is that the thresholds for the tax aren’t indexed for inflation.
As such, middle class Americans are now subject to it as well.
This year, MFJ Taxpayers who earn over $250K will be subject to the tax. Single taxpayers over $200K will face it as well.
The Net Investment Income Tax (NIIT) effectively forces taxpayers to pay a 3.8% Medicare Tax in addition to standard Capital Gains Taxes on their investment income. Originally the tax was imposed to raise funds for the Affordable Care Act.
That’s right. In addition to our monthly premiums tripling, we also got hit with this additional tax.
If you’re at the 20% Capital Gains Rate it means that you’ll now pay 23.8% if your income is over the threshold. It’s literally nothing more than an additional surtax on investment income.
There are only two ways to avoid it…
Make Less Money
If you can get your overall income below the threshold, this additional tax won’t be levied. I realize how ridiculous this sounds, but any serious discussion of the topic must include this option.
Harvest Tax Losses
Savvy investors generally don’t face this issue because they’re smart enough to harvest their tax losses before the end of any fiscal year. This means that you sell your investments that are showing a loss sometime inside the tax year.
There isn’t anything easy about this because as Entrepreneurs hope springs eternal, but we all must face the fact that there’s a time to either fish or cut bait. If you’re in a position where you’re showing a loss, but ultimately think the investment will do great things, then you should talk to your investment advisor about trading specifically to generate a loss.
Most equities, ETF’s, and bonds have alternatives that will act in a similar fashion. If you sell one, and buy another that will do the same thing, you’ll be able to harvest the loss, not lose the position, and not be subject to the Wash Sale Rules that would negate being able to use the tax loss. in the future.
A Savvy Investor who does this over decades retires with so much in losses they’re carrying forward that they’ll either eliminate or drastically minimize any Cap Gains or NIIT tax on the majority of their retirement income. The concept is to retire and pay little or tax on your investment income.
Let me leave you with this.
If you’re a longer term reader of mine, you know that I’ve been writing extensively about the ability for the owners of S Corps who have their corporations pay for their health insurance to now get a full deduction for those premiums. Now that your W-2’s are being generated, it’s time to take advantage of this deduction.
To explain the issue, let’s set up a case study.
Joanne B. Owner has an S Corp, takes a $50K W-2 and has additional K-1 earnings of $300K. Her company has a group health policy and pays $20K annually for Joanne’s portion of the health insurance.
That $20K is not deductible at the S Corp level, but is deductible at the individual level on Joanne’s Schedule A. The problem is the health insurance limitation of 7.5% of Adjusted Gross Income on Schedule A Medical Deductions.
Since Mrs. Owner will put $350K on her return, the first 7.5% of that income or $26.200 that she pays for health insurance is non-deductible. This means that she’ll lose the entire $20K income tax deduction.
Since she’ll pay 24% at the Federal Level and 5% for the State on a MFJ Return, the loss of the $20K deduction translates into additional taxes of $5,800.
The solution allows us to get a full deduction for Joanne’s entire annual premium, saving her $5,800..
It requires us to add the $20,000 in health insurance costs to her W-2. This in turn allows us to piggy back the Self Employed Health Insurance Deduction rules taking a full deduction for the premium on Schedule #1, Line 17.
Not everyone is a candidate for this tax move. If you don’t itemize, then obviously this isn’t for you. If your income is lower and you usually get a full deduction for your health insurance, then nothing needs to be done.
But if you are a candidate, then getting this completed correctly isn’t the easiest thing on the planet. It requires a payroll service that knows tax law. When’s the last time you spoke to anyone at your payroll service who actually did? It also requires an accountant with a brain.
If you need help in this area, please don’t hesitate to contact us.
We’re all going to get through this. Let’s get through it together.
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Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,
Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
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