Managing Net Investment Income Against the 3.8% ObamaCare Surtax

Posted on Mon, Jan 14, 2013 ©2021 Drucker & Scaccetti



Today we have a guest blog from our friends at Comprehensive Investment Solutions.  We hope you find their post helpful!


In light of the 3.8% Medicare Surtax applied to Investment Income in 2013 for high-income clients, by managing taxable investment income using several techniques; you can reduce or eliminate the immediate tax impact.


First, this new surtax only applies to investment income when total income exceeds a threshold amount ($250,000 for couples, $200,000 for individuals).  If total income will exceed the threshold, then taxable investment income will be hit with the new surtax.  The key is to know if the tax is relevant to you.  If so, there are several techniques to reduce or eliminate its impact.


As investments generate various forms of income (interest, dividends, capital gains, etc.) and as taxation applies differently to each type of income, investments are also held in different types of accounts that affect taxation of the holdings within those accounts.  Without letting the “tax tail” wag the dog, a tax-sensitive investment program can “shelter” your investments from regular tax as well as the new Medicare Surtax.


Prudent investing dictates that we consider all of one’s investment assets as part of a cohesive investment plan, regardless of the accounts holding these investments.  Individual, joint, IRA, 401k, and investment subaccounts in annuities and insurance policies are typical accounts that hold investments. These should all be considered as part of a plan to allocate your assets according to a cohesive portfolio strategy.  By coordinating the tax aspects of each investment with the tax aspects of each investment account, you can usually achieve a target taxable investment income.


By using dollars invested in the tax sheltered accounts (IRAs & 401ks) to buy the most tax egregious investments (ordinary income producing assets such as high yield bonds, REITs, etc.), your ability to shelter from tax is limited only by the size of the sheltered accounts vs. the taxable accounts.  Next, assets can be treated as tax “free” if invested in tax free municipal bonds or held in Roth IRAs.  Use municipal bonds for the bond allocation in taxable accounts.   Roth IRAs can hold anything and will be treated as tax free (under most circumstances).  Finally, if you still have investment income exposed to tax, a new “shelter” can be created to hold the rest of the assets in the asset allocation strategy by using a low-cost, non-qualified variable annuity as the “account.”


A more detailed outline of this strategy to reduce net investment income through the use of a low-cost, non-qualified variable annuity contract can be found here. The paper, authored by Comprehensive Investment Solutions, LLC, addresses many of the traditional objections to variable annuities and examines the cost and benefits of employing such a strategy.


If you have questions about this post you can contact Thomas N. Alvare, CPA/PFS from Comprehensive Investment Solutions, LLC at (215) 497-5050.

Topics: fiscal cliff, Surtax, 3.8% Investment Income, Tax, Affordable Care Act, Medicare, Obamacare

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