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The 3.8 percent investment tax may be here to stay

- Last modified: November 21, 2012 at 10:27 AM

As we approach the holiday season, it’s time to start your final tax planning for the year — and this year it seems more important than most years, as the 3.8 percent surtax on investment income is set to come into effect Jan. 1.

This is a tax that seems to have taken many by surprise due to the public outcry of its origins. The tax came about to help pay for “Obamacare,” and many felt that the law would be eventually overturned. Last summer, however, the U.S. Supreme Court upheld the 2010 health care act, making it extremely likely the 3.8 percent surtax will begin to hit many high-income Americans in the new year.

The 3.8 percent surtax will be applied to an investor’s net investment income if modified adjusted gross income (MAGI), exceeds the threshold. For single filers, the threshold is $200,000. For married couples filing a joint return, it is $250,000.

The question many will be asking is what the IRS will consider investment income? As is often the case with the tax code, that question may not be easily answered.

It appears that the basics will be included, such as interest, dividends and capital gains, along with royalty income, passive rental income and annuity distributions.

What's not included are things like wages, self employment income, IRA distributions, municipal bond interest and veterans benefits. Also excluded are life insurance proceeds, Social Security benefits and the excluded gains on the sale of a principal residence.

However, while these funds will not be taxed, they are included in your MAGI and can cause you to break the threshold, thereby causing the surtax to be applied to your other income areas.

While this list seems to be rather inclusive, the actual regulations are not even written yet and may not be till the end of 2013. This makes it rather difficult to plan ahead for these events.

I am urging customers to take a page out of the Boy Scout handbook and “be prepared.” Here are some pro-active things to consider in your upcoming planning.

Lately, many people have been converting traditional IRAs to Roth IRAs while taxes are generally considered low. But because the conversion will increase your MAGI, you might trigger the tax threshold with a conversion in 2013. Consider converting this year to keep your 2013 MAGI lower.

Salary deferrals such as 401(k), 403(b), etc. – can reduce your MAGI, so consider some extra deferrals in 2013.

Any pro-active tax planning is a good idea and will be even more important with how dramatically our tax laws may be changing next year. Getting good advice from qualified tax and financial advisors will be more crucial than ever.

Joe Wirbick is the president of the Lancaster financial services firm Sequinox. Joe specializes in retirement planning and distribution. This allows him to concentrate on developing strategies that help address the unique issues that confront retirees and those approaching retirement.

Tax information is provided for informational purposes only; changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. Tax returns should be completed in conjunction with a qualified tax professional. While we are familiar with the tax provisions of the issues presented herein, Sequinox Financial and JWC/JWCA do not offer tax advice and are not affiliated. Mr. Wirbick is an investment adviser representative offering advisory services through J.W. Cole Financial Advisors, Inc.. (JWCA) and securities through J.W. Cole Financial, Inc. (JWC) Member FINRA/SIPC. The opinions expressed are those of Mr. Wirbick and based on information believed to be reliable but not guaranteed and subject to change and do not necessarily reflect the position of JWC/JWCA.JWC/JWCA and Sequinox are unaffiliated independent entities.


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