Are You Ready for the New Investment Tax? – Wall Street Journal – 04/27/13




The Wall Street Journal

Weekend Investor – Tax Report – April 27, 2013

Are You Ready for the New Investment Tax?

The 3.8% tax on investment income, which Congress passed to help pay for health-care changes, takes effect this year for many investors. Here are ways to minimize the hit.

By Laura Saunders

It’s time to grapple with the new 3.8% tax on investment income.

The ordeal of 2012 taxes is barely over. But it isn’t too early to understand and cushion the blow of the investment-income levy, which Congress passed in 2010 to help fund the health-care overhaul.

The tax, which took effect Jan. 1, applies to the “net investment income” of married joint filers who have more than $250,000 of income (or $200,000 for singles). Only investment income—such as dividends, interest and capital gains—above the thresholds is taxed. The rate is a flat 3.8% in addition to other taxes owed.

To find out how the new tax will affect you, check out the Tax Policy Center’s free online tool at Users can plug in numbers from 2012 returns—or any numbers—and get a side-by-side comparison of taxes for 2012 and 2013, detailing which elements will change.

Congress and the Internal Revenue Service have designed the 3.8% tax to cast a wide net. (See box on this page.) But there are exceptions, plus strategies for minimizing the hit. Here are steps to consider.

Minimize your adjusted gross income. What reduces AGI? Among other items: 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.

Rearrange your assets.

Time income if possible.

Harvest losses.

Don’t fret about your house—in most cases.

Know how retirement income helps—and hurts. 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.

Consider Roth IRA conversions.

Understand what’s exempt. Life-insurance proceeds, gifts and inheritances are also not subject to the tax, nor are appreciated assets donated to charity.

Check in with your hedge fund.

Go offshore.

Know what’s different for trusts.

Hold investments until death.


Comments April 27, 2013

Unfortunately, the Required Minimum Distribution (RMD) payments from Traditional IRAs and 401(k)s can subject investment income to the 3.8% investment tax.  Fortunately, 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.

Section 529 of the Internal Revenue Code allows for 529 higher education savings plans (529s).  Like Roth IRAs, Roth 401(k)s and Roth 403(b)s, withdrawals from 529s are not classified as income (subject to the Code’s withdrawal rules) – avoiding the domino effect described above.  Thus, they all provide excellent tax shelters.  Importantly, 529s are neither subject to RMDs nor are they subject to estate taxes.


Aaron Skloff, AIF, CFA, MBA
CEO – Skloff Financial Group


Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA), is the Chief Executive Officer of Skloff Financial Group, a Registered Investment Advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small to middle sized companies.  He can be contacted at or 908-464-3060.


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