Peloton is pleased to share this article by guest contributor Nick Hopkins with you.  For more information about Nick and his firm, please see the information at the bottom of this page.  


During the tax filing season this year, many people were surprised to find an additional tax on their bill they hadn’t even known about.

As part of the federal healthcare reform legislation, a new 3.8% Medicare tax was applied to net investment income. The NIIT, as it is known, affects modified adjusted gross income in excess of $250,000 for married couples filing jointly, or $200,000 for single filers.

While no one welcomes a tax increase, with a little planning and the counsel of your financial advisors it is possible to minimize the impact of the NIIT on your tax obligations.

The amount actually subject to the NIIT is the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds the threshold amount. Net investment income includes:

• Interest, dividend, annuity, royalty and rental income (unless derived in the ordinary course of a trade or business)
• Income from passive activities
• Net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property other than property held in an active trade or business

Certain types of income are excluded from the NIIT, including qualified retirement plan distributions, tax-exempt income, active trade or business income, items taken into account in determining self-employment, and gains on the sale of a principal residence (to the extent the gain is excluded from gross income).

The following are steps to consider for reducing or averting the 3.8% Medicare tax:

Manage your adjusted gross income. Consider accelerating deductions or deferring income in order to stay below the taxable threshold.
Consider tax-exempt bonds. Tax-exempt income lowers your modified adjusted gross income (MAGI) and is not subject to the NIIT.
Consider rebalancing your investment portfolio. Emphasize growth stocks over dividend-paying stocks.
Utilize capital losses to offset capital gains subject to the tax.
Consider charitable donations of appreciated securities rather than cash. This will avoid the capital gains tax on the built-in gain of the security and avoid the 3.8% NIIT on the gain, while still generating a charitable income tax deduction.
Consider the timing and amounts of distributions from retirement accounts. Although distributions from such accounts are not considered net investment income, the taxable portion of such distributions increases MAGI, which could create a tax on investment income. Since Roth IRA distributions are not taxable, they do not increase MAGI. Taxpayers with traditional IRAs should contemplate converting to a Roth in a year when investment income is minimal.
Consider installment sales and the timing of principal collections to remain below the taxable threshold.
Consider triggering suspended passive loss carryovers by disposing of a passive activity.
Consider using like kind exchanges under Section 1031 to defer the recognition of net gains.
Examine all activities to determine how they are defined: passive or non-passive. Consider grouping elections to achieve material participation (i.e., non-passive).
If involved in rental activities, consider the election to group activities to become a “real estate professional.”

If you have any questions about the 3.8% Medicare tax, please email me at [email protected].

Nick Hopkins is a Partner and Director of Tax Services for Sponsel CPA Group. A CPA and Certified Financial Planner® with more than a decade of expertise in taxation and business consulting, Hopkins has provided financial, strategic and tax planning counsel to corporations and not-for-profit organizations across a wide spectrum of industries, and advised on business mergers and acquisitions and complex multi-state tax issues.