Thursday, March 25, 2010 Health care bill adds new tax on investment income of high earners but may be easily defeated by income shifting
Section 1402 of the reconciliation bill proposes to introduce a 3.8% surtax on the lesser of investment income or the excess of modified adjusted gross income over a specified threshold amount. As currently defined (Section 1402), “threshold amount” means $250,000 for joint filers or surviving spouses, $125,000 for married filing separately, and $200,000 in all other cases. “Net investment income” is defined to include income from interest, dividends, annuities, royalties and rents.
Two thoughts immediately come to mind; (1) this does not necessarily mean all our investment income will be taxed. For example if all your income consisted of interest and rents and it equaled $275,000 for a married couple, only $25,000 of the investment income is subject to the tax and (2) family LLCs can be used to disperse income among children to defeat the tax. Even though childen under 18 or students under 23 pay the same tax as theuir parents on investment income, it is highly unlikely that their investment income approaches anywhere close to $200,000 (single person threshold).
Additionally, this tax will make Roth conversions an even better deal. Charitable remainder trusts can be used to avoid spikes in income. Charitable lead trusts become more imporatant. Installment sales will have more merit to smooth income and municipal bonds will continue to be popular.
As has been the case, is the case, and will be the case, the informed pay less taxes than the uninformed. It pays to plan whether it is for taxes, retirment, long term care, or for your estate. Planning pays huige dividends, the kind that don't count toward the threshold amount. |