Americans Concerned about the New 3.8% Tax Should Consider These Two Strategies, Says Financial Firm Wealth Preservation Strategies of NJ

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Obamacare’s 3.8% Medicare tax on “unearned” investment income has high wage earners scrambling for tax shelters to avoid or minimize this extra tax scheduled to begin in January 2013, according to the financial firm Wealth Preservation Strategies of NJ. This article explains two tax shelters that may be considered as potential strategies to avoid this tax.

Are you ready for the Obamacare 3.8% tax?

Obamacare’s 3.8% Medicare tax on “unearned” investment income has high wage earners scrambling for tax shelters....

There are many articles on the web explaining the new Obamacare tax and how it will apply to high wage earners. Investors who predict that they will be affected by this tax due to interest and dividend income in 2013 may want to consider moving some of their taxable accounts into tax-deferred accounts or tax sensitive investment options, if they do not presently need the income from these investments.

"One tax-deferral strategy is to place the money into a tax-deferred annuity," says Brian Solik, CRPC, President of Wealth Preservation Strategies of NJ. Taxes are deferred until withdrawals are made, so if income is not needed, the money can be kept in this shelter for extended periods. There are no mandatory withdrawals at any age for non-qualified (made with taxable dollars) annuities.

There are a variety of annuities available, and all afford the owner the same tax benefit. There is no maximum contribution amount, other than any limits set by a particular insurance company. Those under 59 ½ should be aware that typically any withdrawals on annuities before age 59 ½ result in IRS-mandated early withdrawal penalties, according to Solik.

Another tax shelter strategy that is a bit more complex but still readily accessible to most investors is a cash value life insurance policy, advises Solik. Again, there are various types, but all follow the same tax codes established by the IRS. If IRS guidelines are followed to avoid making the cash value in the life policy taxable, the policy can gain access to the cash through loans or withdrawals without paying federal or state taxes. Furthermore, there are no early withdrawal penalties for those under 59 ½. Policy holders are free to access their cash at any time for any reason.

While annuities may be suitable for those wanting to shelter a lump sum of money, cash value life policies are generally designed to have premiums paid into the policy for seven to ten years or more. Otherwise, the policy can forfeit its tax shelter benefits. Although money can be accessed at any time, investors should be aware that these policies are designed to be a long-term holding and cash value typically builds slowly over time. These policies always have a federal and state tax-free death benefit associated with it, which is a significant factor to consider when evaluating tax shelters, Solik adds.

These strategies also can work for those who won’t have to pay the 3.8% tax but are simply trying to reduce the amount of their reportable income in order to reduce their social security income tax. Couples filing jointly with a modified gross adjusted income (MAGI) over $44,000 can have up to 85% of their social security income taxed.

So, even for those under the threshold who avoid the new 3.8% tax, these tax shelters can be a benefit.

While investors should always consult their tax advisor, they shouldn’t expect all accountants to suggest the above two strategies-some may not be aware of them or are not familiar enough with them to explain them to their clients, says Solik. Many brokers offer their clients annuities, but are not typically familiar with cash value life policies. It is best to consult with an experienced life insurance agent to evaluate the suitability of these policies as a tax shelter.

Brian Solik, CRPC is President and Founder of Wealth Preservations Strategies of NJ. He is a former Wall Street broker who now focuses on educating investors on how to maximize their financial security and minimize taxes. Questions or comments can be directed to Brian at 732-415-7717, bsolik(at)brokersifs(dot)com or visit his website

Securities and investment advisory services offered through Brokers International Financial Services, LLC, Panora, Iowa. Member FINRA/SIPC. Brokers International Financial Services, LLC and Wealth Preservation Strategies of NJ are not affiliated companies. The opinions expressed are those of Brian Solik and not necessarily those of Brokers International Financial Services, LLC.

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