The Nasty 3.8% Investment Tax

Posted on Apr 6, 2015 in Blog, Investments, News, Tax Planning | 0 comments

The Nasty Tax Here we are, 2 years after getting rooked with a 5 dimensional tax system, and many people are still unaware of the Nasty Tax: 3.8% Net Investment Income Tax (NIIT). I think the IRS used Wal-Mart pricing strategy with 8’s when they derived the number so it the smell would go un-noticed. But since it’s tax time, let’s talk about what’s in the baggie. The NIIT is a surtax of 3.8% that covers a broad category of investment income sources. Determining how the tax is applies involves a fairly simple two step calculation. But first, let’s cover what’s included. What’s Included: interest, dividends, annuities, royalties, rents, income from a business that is a passive activity with respect to the taxpayer, and net capital gain on the sale of non-business assets, reduced by any deductions properly allocable to such income. Does not include salaries, wages, bonuses, distributions from IRAs or qualified plans, or self-employment income. Are You Affected? 3.8% surtax that applies to the lesser of: 1. Net investment income (NII) or 2. The excess of your modified adjusted gross income (MAGI) over $200,000 (Single) or $250,000 (Married filing jointly). Remember, your MAGI is the amount reported on the last line one page 1, Form 1040.             First, add up your income subject to the Surtax. Subject to Surtax Exempt from Surtax Wages      X Taxable Interest      X Exempt Interest      X Dividends      X Annuity Income      X Passive Royalty      X Active Royalty      X Rents      X   Next, look at the Threshold Amount • Single taxpayers – $200,000 • Married taxpayers – $250,000 • Estates/trusts – $12,150 Example: Tammy, a single taxpayer, has $225,000 of net investment income and no other source of income. The 3.8% surtax would apply to $25,000 of income. (the lesser of investment income of $225,000 or the excess of $225,000 MAGI over $200,000 “threshold amount”). Example: David & Darla, married filing jointly, have $200,000 of salaries and $150,000 of net investment income for total MAGI of $350,000. The 3.8% surtax would apply to $100,000 of income because the excess of $350,000 MAGI over $250,000 threshold amount is $100,000 and LESS than their NII of $150,000. How to Reduce NIIT 1. Look at Your Dividends. There can be a meaningful difference in the tax rate on ordinary versus qualified dividends (43.4% versus 23.8% highest brackets). Review your 1099 statements. Lines 9a and 9b on your 1040: Tax-inefficient mutual funds can generate short-term capital gains, which are classified as ordinary dividends. Consider a tax-managed implementation, or if dividends are not needed for cash flow again, consider asset location. Taxation of Traditional Dividends- Ordinary Income...

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Recommended Reading: Brené Brown’s “The Power of Vulnerability”

Posted on Aug 26, 2014 in Blog, News | 0 comments

 If you haven’t heard of Brené Brown, watch this excellent 20 minute video.  I just finished listening to her book “The Power of Vulnerability”.  Brown’s insights resonate with truths that help breakdown the superficial beliefs that our culture imposes on us.  She shows us the healthy definition of vulnerability and how being authentic can enrich your relationships and life.   [ted...

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Grandmother Dupes 146 Million People

Posted on Jul 18, 2014 in Blog, News | 0 comments

“Something is rotten in the state of Denmark.” Hmmm.. The New Yorker is promoting the Federal Reserve Chair Janet Yellen as the protective grandmother for the middle class and unemployed. Conspicuously absent in Nicholas Lemann’s profile in the magazine is her track record. Yellen’s Clinton Era and Recent Highlights: Backed the repeal of the landmark Glass-Steagall bank reform; Supported the 1993 North American Free Trade Agreement; Endorsed establishing a new statistical metric that would allow the federal government to reduce Social Security payments over time, by revising the consumer price index; Advocated cutting veterans’ benefits; Rejected concerns that increased concentration in banking as an antitrust risk; Supported cap and trade; Complained about deadbeat borrowers declaring bankruptcy in 1997. Does this seem like someone who is concerned with unemployment and the middle class? Senator Elizabeth Warren (D-Mass.) proves to be our Marcellus. During a congressional hearing on the compliance of our oligopoly banks with the “too-big-to-fail” laws requiring them to craft plans for their own orderly breakups, Warren takes Yellen to the mat. Warren points out that at the time of its bankruptcy, Lehman had $639 billion in assets; today, JPMorgan has nearly $2.5 trillion in assets. In addition, Lehman had 209 subsidiaries when it failed; today, JPMorgan has 3,391 subsidiaries, or more than 15 times the number Lehman had when it went under. This video clip is definitely worth 7 minutes of your time: Yves Smith at Naked Capitalism has an excellent critique exposing the cozening grandmother that has no accountability to 146 billion voters. Other Sources Andy partners with individuals, families and entreprenuers to provide objective and comprehensive financial planning. Andy is a Fee-Only, Certified Financial Planner™ and Registered Investment...

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Argentina Odds

Posted on Jul 13, 2014 in Blog, News, Uncategorized | 0 comments

Argentina: Playing the Odds. In today’s World Cup Final, Argentina is a 3 to 1 underdog. Maybe enticing odds for soccer fans, but miniscule for a world famous hedge fund guru’s bet on the land of Patagonia. Paul Singer launched a hedge fund in 1977. He is known as one of the first high profile “vulture investors,” and his fund, Elliott Management, invests opportunistically, with more than a third of its portfolio in distressed debt across the industrial and real estate industries, as well as on that of sovereign nations. 11 years ago, Singer invested $84 million in Argentina bonds that subsequently went into default. After three major legal victories and searching the world for missing assets, Singer is just weeks away from collecting $832 million on his original investment. If this happens, he will realize a tidy 1,600% return on his investment. Singer is also an activist investor, where he battled to win three board seats on Hess Corp in efforts to unlock value and increase returns to shareholders. Since inception, Elliot Management has delivered annualized returns of 14%. Elliot Management Holdings: I use a service called to track insider buying of companies and funds. Here’s the current holdings for Elliot Management. Sources: Crowdfunding and Drinkable Meals I have a soft spot for start-ups and supplements. Crowdfunding is a way for someone to raise money for their idea or cause by putting it on the net for prospective investors. I’m on site called Indiegogo and come across Ambronite, a real food drinkable supplement. The investment proposition is to invest by pre-ordering the meals. So, I put in for $79 in hopes that someday 10 drinkable meals will arrive at my door. They more than doubled their $50,000 goal. If youre not familiar with crowdfunding, here’s a list of crowdfunding sites. I must warn you that this could become a real time suck. You come across so many interesting ideas, and most appealing to me, is the strong sense that the entrepreneurial spirit is alive and growing!

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Heartbleed Facts and What To Do

Posted on Apr 16, 2014 in Blog, News | 0 comments

Heartbleed is serious. What is it? The Heartbleed Bug is a vulnerability in the popular OpenSSL cryptographic software library.  It allows stealing the information protected, under normal conditions, by the SSL/TLS encryption used to secure the Internet. SSL/TLS provides communication security and privacy over the Internet for applications such as web, email, instant messaging (IM) and some virtual private networks (VPNs).  The Heartbleed bug allows anyone on the Internet to read the memory of the systems protected by the vulnerable versions of the OpenSSL software. This compromises the secret keys used to identify the service providers and to encrypt the traffic, the names and passwords of the users and the actual content. This allows attackers to eavesdrop on communications, steal data directly from the services and users and to impersonate services and users. NSA Knew About Heartbleed From Tyler Durden at  “It is one thing for the NSA to spy on everyone in the world, especially US citizens because all of them are obviously potential “terrorizers” just waiting for their opportunity to blow shit up (except for anything in close proximity to the Boston marathon – those things the NSA promptly filters out), but when the NSA itself is found to have not only known and itself abused the prevalent and widespread Heartbleed bug, but left consumers exposed, then it may be time to finally launch a class action lawsuit against Obama’s favorite means to eavesdropping on the entire world.” You Are at Risk Even the big anti-virus folks have been affected.  95% of the detection tools failed.  “Symantec has identified that some of its products may be impacted by the OpensSSL vulnerability, dubbed Heartbleed. We have begun issuing advisories to our customers to alert them and provide mitigation solutions while we work to deploy any necessary patches.” What To Do Reset ALL YOUR PASSWORDS.  Ask your provider to confirm they have patched BEFORE resetting your password. If you re-set prior to the patch you are just increasing the chance of handing out your username and password . They may have a public statement, or you can contact them to check.  How to tell which passwords you need to change because of Heartbleed Check Websites You Use To find out if a site was vulnerable first see the Heartbleed Hit List on Mashable or type out the site in question in LastPass. Also Google “[site] heartbleed” to find information directly from the source. I started with my most important accounts (email, finance, anything I entered a credit card into). You’ll see if they patched the SSL bug from the step above. If they haven’t, wait until they do before you change your passwords. (Most sites already have...

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Tax Bracket Strategies

Posted on Apr 12, 2014 in Blog, News, Tax Planning | 0 comments

Tax Planning to Avoid ATRA-phy The American Taxpayer Relief Act.  Brought to you by the same people who ushered in Super PACs guised as “campaign finance reform” and unleashed the Orwellian flood by calling it “The Patriot Act”.  The relief is comes in the form of 20% top tax rate on dividends and long-term capital gains, and 39.6%  top tax rate on ordinary income and short-term capital gains.  Throw in net investment income tax (NIIT), and the top rates could be as high as 23.8% and 43.4%, respectively.    Plop, plop, fizz, fizz… Bracket Strategies Now, more than ever, tax bracket utilization strategies have become key planning issues with my clients.  Bracket utilization is a term to describe flying under the radar of higher tax brackets.  You start by calculating your long-term tax rate (out to 15 years), assuming it’s below the 39.6% threshold, and use strategies to keep it below the higher brackets.  In addition, you look for ways to fill up the current year tax bracket right up to the last dollar.  Why?  Suppose your income moves your tax bracket up 10% next year, then you will need to beat 10% to make it a good deal for deferring that income. This wasn’t always the case.  In the past, I would focus on harvesting losses and deferring income and gains where possible in order to reducing the current year’s tax liability.   Today, I focus on ways to help clients avoid having to pay taxes at those higher marginal rates and phase-outs in the future by harvesting gains today and filling up tax brackets in the current year. Using Roth Conversions for Bracket Management – If you have traditional IRAs and your tax brackets will be higher in the future, you may want to convert some of those funds into Roth IRAs.  This is often referred to as “filling-up” the 10% and 15% tax brackets.  As an example, Ms. Jones will make $220,000 this year, so she has a $30,000 gap before jumping into the surtax. Next year it looks like her income might reach $270,000.  If she does a Roth conversion now and picks up that income, she will smooth out some of the surtax. 15 Impactful Bracket Management Ideas As part of my quest to increase my knowledge on bracket management, I’ve become a student of Robert S. Keebler, CPA.  I read as many of his articles as I can, as well as purchased his fantastic tax charts.  Keebler shares these 15 good tax strategies than you can use to keep out of higher tax brackets and reduce or eliminate NIIT. Strategies for Staying Out of Higher Tax Brackets and Avoiding NIIT Harvesting Capital Losses. The taxpayer...

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