Question

4 pages on are there ways to plan around the net investment income tax?

Answer 1

The income tax rules and regulations applicable in the county allows the tax payers to use various income tax provisions and take advantage of these provisions by reducing their taxable income and subsequently the income tax liability on such taxable income. As there are plans to reduce the taxable income of tax payers and subsequently the income tax liability on such taxable there is also few provisions which allow the tax payers to reduce their income tax liability for net investment income. Let us discuss these methods and ways to plan around the net investment income in such a way to reduce the income tax liability on such income.

The investment income tax law over the years have undergone number of changes thus, it is important to keep track of these changes in income tax law relating to the investment income to plan around the net investment income tax. Investment income tax similar to other taxes on income will mainly depend on the amount of investment income a tax payer will make in particular year. However, knowing the income tax law relating to the investment income will be crucial to plan net investment income tax.

There are number of steps that can be taken by the tax payer to reduce the net investment income tax. Let us dwell on these steps and ways which can be used to plan the net investment income tax of a tax payer. However, before proceeding it is important to know that this particular tax affects the wealthy only, i.e. the individuals with earning more than $200,000 a year will only be subjected to the net investment income tax. The net investment income tax which is 3.8% as per the current income tax rules and regulations in the country can be planned by taking the following steps;

Way 1:

Firstly, the tax payer should focus on the threshold amount, i.e. if the amount of income is under the threshold limit then the tax payer will be able to avoid the payment of net investment income tax. The threshold amount for net investment income are provided below for different category of tax payers;

1. Single tax payer threshold limit is $200,000 in a year.
2. Married tax payer threshold limit for the net investment income tax is $250,000 in a year.
3. Married tax payer but filing return separately will have $125,000 as the threshold limit in a year for the purpose of net investment income tax.
4. The threshold limit for estates and trusts is $12,125 a year.

Apart from staying under the threshold limit which will allow the tax payers to completely avoid payment of net investment income tax, the tax payers can use the following ways to plan the net investment income tax.

Way 2:

IRA allows conversions for income tax purposes. Use of Roth IRA conversion will help the tax payer to plan the net investment income tax.     

Way 3:

The tax payers should use instalment sales to reduce the investment income and subsequently plan the net investment income tax.

Way 4:

Charitable Lead Trust deed can be used t plan the net investment income tax.

Way 5:

Charitable Remainder Trust deed can be used t plan the net investment income tax.

Way 6:

Use of municipal bond will be helpful for planning of net investment income tax.

Way 7:

Use of tax deferred annuities.

Way 8:

Use of life insurance policies.

Way 9:

By using rental real estate.

Way 10:

By making investment in oil and gas industry.

Way 11:

By making trust distributions.