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Newsletter December 2015

The Net Investment Tax Bite

The Patient Protection and Affordable Care Act, also known as “Obamacare”, has been partially funded by an additional 3.8% tax on the net investment income of individuals, trusts and estates. It went into effect on January 1, 2013.

The Net Investment Income Tax, as it is known, is imposed on the unearned income of married taxpayers filing jointly with modified adjusted gross income over $250,000 and single taxpayers with modified adjusted gross income over $200,000. For trusts and estates, the tax starts at $12,300 of undistributed net investment income or the excess of adjusted gross income over the $12,300 amount.

Interest, dividends, capital gains, annuities, rent, royalties, passive income, income from a trade or the business of trading in financial instruments or commodities are all subject to the 3.8% additional tax. Not included are active trade and business income from a K-1 form, distributions from qualified retirement plans and IRAs, income subject to self-employment tax, municipal bond interest, social security benefits, life insurance death benefits, alimony, unemployment and wages.

The Form 8960 is used to compute the tax after allowed deductions including investment interest expense, pertinent state, local and foreign tax and miscellaneous investment expenses. It is filed along with the appropriate tax return and the tax is paid with the return. Tax plan now to reduce adjusted gross income can include harvesting tax losses to reduce capital gain income.

Year-end planning opportunities

Now is the time to review your opportunities to save taxes on your 2015 tax return.
  1. Consider taking capital losses on stocks that have decreased in value to shelter other capital gains taken during the year.
  2. Increase charitable contributions by donating appreciated stock rather than cash. Also, any charitable donation made by credit card in 2015 can be deducted in 2015.
  3. Maximize retirement contributions and health-care savings accounts before year-end.

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Corporations: File 2017 form 1120 and 1120S if extended
Corporations: File third quarter estimated tax for C-Corporations
Partnerships: File 2017 form 1065 or 1065-B if extended
Individuals: File third quarter estimated tax
Individuals: City third quarter estimated payment due

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