Planning For The 3.8% Investment Tax

Higher income investors need to plan for the 3.8% “unearned income Medicare contribution” tax. This 3.8% tax was enacted as part of the 2010 health care overhaul.

Some Details

The tax applies only to taxpayers with modified adjusted gross income (AGI) above these levels: $200,000 (single/head of household), $250,000 (married filing jointly/surviving spouses), or $125,000 (married filing separately). The tax is calculated on the lesser of net investment income or the amount of modified AGI in excess of the threshold.

Example. Bill’s modified AGI is $250,000, $50,000 more than the $200,000 threshold for his single filing status. His net investment income is $60,000. Bill will owe the 3.8% tax on $50,000 since that amount is less than his $60,000 net investment income.

Net investment income generally includes interest, dividends, capital gains, annuities, royalties, and rents. It also includes income from “passive” trade or business activities, such as pass-through income from limited partnerships, S corporations, and limited liability companies in which a taxpayer does not materially participate.

Strategies

Taxpayers will have to plan carefully to minimize their exposure to the tax. Various timing strategies may be effective, especially if modified AGI is close to the threshold. Other strategies that may be helpful include:

  • Increasing involvement in profitable trade or business activities so that material participation can be shown
  • To the extent possible, offsetting capital gains with losses
  • Investing in municipal bonds, since tax-exempt interest is not included in net investment income or modified AGI for purposes of this tax
  • Maximizing pretax contributions to retirement plans

Of course, taxes are only one factor to consider when weighing investment decisions.

“Extender” Legislation Impacts Individuals and Small Businesses

The federal spending package that was enacted in the waning days of 2019 contains numerous provisions that will impact both businesses and individuals. In addition to repealing three health care taxes and making changes to retirement plan rules, the legislation extends several expired tax provisions. Here is an overview of several of the more important provisions in the Taxpayer Certainty and Disaster Relief Act of 2019.

Deduction for Mortgage Insurance Premiums

Before the Act, mortgage insurance premiums paid or accrued before January 1, 2018, were potentially deductible as qualified residence interest, subject to a phase-out based on the taxpayer’s adjusted gross income (AGI). The Act retroactively extends this treatment through 2020.

Reduction in Medical Expense Deduction Floor

For 2017 and 2018, taxpayers were able to claim an itemized deduction for unreimbursed medical expenses to the extent that such expenses were greater than 7.5% of AGI. The AGI threshold was scheduled to increase to 10% of AGI for 2019 and later tax years. Under the Act, the 7.5% of AGI threshold is extended through 2020.

Qualified Tuition and Related Expenses Deduction

The above-the-line deduction for qualified tuition and related expenses for higher education, which expired at the end of 2017, has been extended through 2020. The deduction is capped at $4,000 for a taxpayer whose modified AGI does not exceed $65,000 ($130,000 for those filing jointly) or $2,000 for a taxpayer whose modified AGI is not greater than $80,000 ($160,000 for joint filers). The deduction is not allowed with modified AGI of more than $80,000 ($160,000 if you are a joint filer).

Credit for Energy-Efficient Home Improvements

The 10% credit for certain qualified energy improvements (windows, doors, roofs, skylights) to a principal residence has been extended through 2020, as have the credits for purchases of energy efficient property (furnaces, boilers, biomass stoves, heat pumps, water heaters, central air conditions, and circulating fans), subject to a lifetime cap of $500.

Empowerment Zone Tax Incentives

Businesses and individual residents within economically depressed areas that are designated as “Empowerment Zones” are eligible for special tax incentives. Empowerment Zone designations, which expired on December 31, 2017, have been extended through December 31, 2020, under the new tax law.

Employer Tax Credit for Paid Family and Medical Leave

A provision in the tax code permits eligible employers to claim an elective general business credit based on eligible wages paid to qualifying employees with respect to family and medical leave. This credit has been extended through 2020.

Work Opportunity Tax Credit

Employers who hire individuals who belong to one or more of 10 targeted groups can receive an elective general business credit under the Work Opportunity Tax Credit program. The recent tax law extends this credit through 2020.

For details about these and other tax breaks included in the recent law, please consult your tax advisor.

PPP Loan Forgiveness

The SBA recently released the Paycheck Protection Program (PPP) Loan Forgiveness Application along with some key clarifications in completing the application process. The Forgiveness application is intended for small business owners whom received a PPP loan as part of the CARES Act.

The PPP Forgiveness application is comprised of 11 lines used to calculate the amount of forgiveness a small business owner is eligible for.  All or part of the PPP loan may be forgiven as long as the small business used the funds for payroll, business mortgage interest, rent or utilities.

The newly-released application essentially asks for the payroll and qualifying non-payroll costs that the business spent over the eight-week period since receiving PPP funds. The amount of forgiveness may be reduced depending on whether a business reduced pay for their employees greater than 25 percent, or if the business owner failed to bring back the same number of full-time employees.

The final step in the application process is verification that the business owner allocated at least 75 percent of the PPP funds for payroll costs, and the remaining 25 percent for mortgage interest, rent or utilities.

To learn more about completing the Paycheck Protection Program Loan Forgiveness application, please contact us.

COVID-19 Update 3/20/2020

Hello Everyone,

Today it was announced that the tax filing date has been moved to July 15th.

We are still working as normal to get your returns done. With the new tax filing date, we want to ensure everyone that if you owe we will be communicating with you to find the right solution for you. Refunds will be done the same way they have been in the past. For the safety of our staff, we have the majority of our office working remotely. Please note emailing your accountant may be the easiest form of communication as we continue to work through this pandemic.  We also aim to have someone in the office every day for any phone calls – if for any reason – you have a problem connecting with someone in the office please email patriciav@weissthompson.com. We are honored to be able to continue to be here for everyone in such a difficult time.

Please stay safe and stay healthy.

 

Thank you,

Weiss & Thompson