Sunday March 9, 2014
Dear Clients and Friends,
Obama Care tax effectively puts 3.8 percent on top of the tax you are paying, which results in tax rates of as high as 43.4 percent for 2013 unless you know how to avoid it.
Affordable Care Act
The Obama Care tax is in reference to the Affordable Care Act pushed by President Obama and may also appear as Medicare tax or Net Investment Income Tax (NIIT) as well. This particular tax is classified as an investment tax. Therefore, if you create an earning on your investments, then you can be sure that 3.8 percent of it will end up with the IRS.
The best way to avoid or minimize the effects of the Obama Care tax is to understand how it works. Basically, there are specific sources of earnings where the 3.8 percent will apply like in the case of:
- Interests, royalties, dividends, and similar investment income;
- Passive income; and
- Sale of property that is not used for business or trade.
One of the most important strategies in reducing your Obama Care tax exposure is to be aware of the thresholds. Staying below these thresholds will give you the chance to create tax savings by maximizing profits and limiting tax payments.
This new tax looks at your modified adjusted gross income to see if it goes over:
- $250,000 when married and filing jointly
- $125,000 for married couples filing separately
- $200,000 for everyone else
To make the proper modifications, you need to meet with your tax expert for proper tax planning. This is because you will be able to pay less tax if you can declare the right types of tax deductions. For example, if you generated $185,000 from your business and an additional $63,000 from investments, filing $48,000 worth of business deductions can result in $19,456 savings in taxes.
The more important thing to focus on here is how to generate the business deductions. You can get it from tax-free rentals or understanding business mileage rules. The easiest way though is to talk it over with your bookkeeping service or tax expert who understands the system completely.
Lesser of Rule
In the context of the Obama Care tax, if your net investment income or your investment income is greater than the modified adjusted gross income threshold, then the lesser of rule applies. For those with no net investment income, there is no need to worry about the additional 3.8 percent tax.
The same can be said for married couples for example who have a threshold of $250,000 and only generate $200,000 in modified adjusted gross income; no Obama Care tax applies. You may have to rely on some Section 179 provisions to create this type of tax shelter, which means the need for the services of a tax expert or bookkeeper.
Under the new Obama Care tax, Section 1031 or deferring taxes presents huge benefits. This section not only allows for the deferment of the 3.8 percent, but also the maximum 20 percent in capital gains tax, which means deferment of as much as 58.7 percent in capital gains tax alone.
The services of a real estate exchange intermediary may be necessary even if Section 1031 is not that complicated. So with just a little cost and a lot of tax planning with your bookkeeper or tax expert, you can defer capital gains and Obama Care taxes until eternity.
Tax Shelter from Rentals
It is still possible to rely on your rental properties to generate some form of tax shelter. In fact, you can get substantial tax deductions along with some positive cash flow if you work it properly. You must be a qualified real estate professional as well as materially participate in the property or group of properties.
This means that you or your spouse should:
- Spend over 750 hours working on properties
- Pass the time test for material participation either as an individual or husband and wife
- Keep a time log to declare rental property losses
When done correctly, there should be no problem creating tax savings from the Obama Care tax.
Passive Loss Regrouping
Usually, owners of multiple businesses, victims of rental property losses, and those looking for legal tax protection strategies are given the chance to undo re redo their passive loss groupings fi they are not completely satisfied with it.
It is not absolutely clear why the IRS provides this opportunity to adjust tax planning with the new Obama Care tax. Regardless, this is something to take advantage of for either your 2013 or 2014 tax obligations to effectively reduce the painful reality of an additional 3.8 percent tax rate.
The reality is that taxes are necessary evils that every member of a civilized society would have to contend with. It would be safe to assume that nobody would be happy shouldering an additional 3.8 percent tax obligation.
Use sound planning with all of these strategies and the assistance of a competent bookkeeping service or tax expert and you can be sure that you will generate tax savings greater than 3.8 percent.