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the potential to impact more high-income taxpayers going forward in the same way the Alternative Minimum Tax gradually affected many more taxpayers over the years than was originally intended — making this a really sneaky tax. So, even if your MAGI is below the threshold levels now, you still need to review your tax return carefully as your income grows. Examples + If you are a married couple with combined wages of $650,000 and an additional $50,000 of dividends and capital gains, your MAGI will be $700,000 ($650,000 plus $50,000), which is $450,000 over the $250,000 threshold. In this case, in addition to the regular income tax you owe on your dividends or the regular capital gains tax you owe on your capital gains, you will also owe the 3.8 percent NIIT on the dividends and capital gains. (Look on line #62 of your 1040 to see if you had any NIIT in 2014.) + If you are a married couple with $230,000 of combined wages and an additional $30,000 of Investment Income, your MAGI will be $260,000 ($230,000 plus $30,000), which is $10,000 over the $250,000 MAGI threshold. In addition to your regular income taxes, you will owe the 3.8 percent NIIT on $10,000. In this case, the lesser amount is the amount of MAGI over the threshold level of $250,000. While an additional 3.8 percent does not seem like a huge increase, remember the 2010 tax law also increased the top tax brackets, increased the capital gains tax from 15 to 20 percent for the top bracket and put a limit on itemized deductions such as income increases. There is also a Personal Exemption Phase Out (PEP) that eliminates your personal exemption completely if you have adjusted gross income over $376,700 for single taxpayers and $427,550 for couples. As a result, top income taxpayers could now be paying 23.8 percent on capital gains and qualified dividends, whereas in tax year 2012 they only paid 15 percent. These are very significant changes and make tax planning even more important than ever. Solutions The law and final regulations leave a number of ways to avoid or reduce the NIIT, some practical, others not so much. For the extreme "taxaphobic," divorce might be a consideration as a way to avoid the NIIT's marriage penalty. Two singles can have MAGI of $400,000 (two times the $200,000 threshold limit for singles), compared with a $250,000 limit for married couples. Other less extreme strategies generally fall into two broad categories: 1) Reduction of MAGI if close to the threshold amounts, and 2) reduction of net investment income. The following is not an exhaustive list, but it will at least provide a starting point for thinking about what can be done to reduce the impact of the NIIT. In all cases, the complexities of the NIIT require good collaboration between your tax accountant and financial advisor. + Many potential solutions to the NIIT involve changes to investment portfolios. Generally, these changes take time and can be a disruption, so they may need to be planned over several years. Generally, restructuring a portfolio into investments that take advantage of tax-free income and investments that allow deferred capital gains and/or income into later years can help considerably. Under NIIT rules, capital losses can also be used to offset capital gains as long as both the losses and gains would have been classified as net investment income. + Appreciated assets donated to charity receive a full deduction but don't have to be recognized as appreciation for capital gain consideration or the NIIT. + A related strategy is to gift appreciated assets to relatives who have incomes below the $200,000/$250,000 threshold levels and let them sell it. We have a "kiddie tax," which means that minors (and students under age 24) have to pay capital gains income tax at their parents' higher rate, but there is no NIIT kiddie tax. + If you have your own business, consider a loan to your business. + Income f rom proper t y rented to your own business — even if you don't materially participate in the business — isn't subject to the NIIT. + Generally, gains from the sale of real estate are subject to the NIIT. However, if instead you do a swap of the property (also known as a Section 1031 like-kind exchange), any capital gain recognized from a sale is deferred until new property acquired in the swap is sold. As an added bonus, a 1031 also defers the capital gains tax. + Consider a n inst a llment sa le of appreciated investment real estate. + Make sure your advisors' fees are being deducted properly. For NIIT purposes, your gross investment income will be reduced by related deductions for investment interest expenses, advisor y and/or broker- age fees, tax planning and prep fees, fiduciary expenses, as well as state and local income taxes. We are not likely to see an end to the added tax complexity and heavier tax burdens on high-income taxpayers anytime soon. But by staying informed, insisting on close collaboration between tax accountants and financial advisors, and staying ahead of the curve, even when that requires thinking about taxes in May, you stand a much better chance of keeping the tax headache we all suffer from under control. Bill Strand, Founder and Principal, has over 30 years of experience in the financial services industry and founded Paradigm: Strategies in Wealth Management LLC in 1995. Strand has particular expertise working with physicians helping them not only achieve financial success but devising creative strategies to preserve the wealth they have worked so hard to build for themselves and their families. Strand meets a lot of physicians who are extremely busy practicing medicine but have no investment plan for financial independence. Find out more at planparadigm.com or by contacting Strand at 763-201-1025, or via email at bstrand@ planparadigm.com. ■ M D N E W S . CO M ■ MD NEWS Minnesota | 1 1

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