The election results virtually guarantee that key portions of health care legislation passed in 2010 will go into effect next year, as scheduled. Thus, many clients will face a 3.8% surtax on investment income.

This tax, designed to augment Medicare funding, may affect single taxpayers with modified adjusted gross income over $200,000 and married couples with MAGI over $250,000.

Bob Keebler, who heads a tax advisory and CPA firm in Green Bay, Wisconsin, suggests some strategies to reduce the impact of this surtax. On his list:

  • Tax-exempt bonds. Switching from taxable bonds to tax-exempts can hold down MAGI and the net investment income that is subject to the surtax.
  • Deferred annuities. Such investments may defer taxable income to future years when a client’s income will be lower.
  • Life insurance. Again, putting investment dollars into a permanent life policy may defer taxable investment income.
  • Oil and gas. Investing in working interests in an oil and gas deal can generate a substantial deduction for intangible drilling costs, thus reducing MAGI and net investment income.
  • Roth IRA conversions. A 2012 conversion will produce taxable income before the 3.8% surtax takes effect. Going forward, Roth IRAs have no required minimum distributions. Thus, clients will avoid the future RMDs that would swell their MAGI and could generate the surtax.

Other tactics on Keebler’s list include charitable remainder trusts, installment sales, maximizing above-the-line deductions such as contributions to qualified plans, accelerating 2013 income into 2012, and careful monitoring of estate and trust distributions.

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