Tax Planning

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Does Your Income Warrant Extra Taxes?
Does Your Income Warrant Extra Taxes? 1600 941 smolinlupinco

If you’re a high-income taxpayer, you may need to pay two extra taxes: a 3.8% net investment income tax (NIIT), and an additional 0.9% Medicare tax on wage and self-employment income. 

Keep reading to learn more about these taxes and what they might mean for you. 

3.8% NIIT

In addition to income taxes, the NIIT applies to your net investment income. This tax affects taxpayers with adjusted gross income (AGI) exceeding the following: 

  • $250,000 for joint filers
  • $200,000 for single taxpayers and heads of household
  • $125,000 for married individuals filing separately 

If your AGI is above this threshold, the NIIT applies to the lesser of: 

  • Your net investment income for the year, or
  • The excess of your AGI over the threshold amount for the tax year 

What incomes are subject to the NIIT? 

Net investment incomes subject to the NIIT include interest, dividends, annuities, royalties, rents, property sale net gains, and passive business income. This does not include wage income and active trade or business income, or tax-exempt income tax such as bond interest. 

After considering your income needs and investments, you may want to consider switching some of those taxable investments over to tax-exempt bonds. 

How does the NIIT apply to home sales? 

If you sell your primary residence, you may be able to exclude up to $250,000—or $500,000 for joint filers—in your income tax, which will not be subject to the NIIT. If your gain exceeds that amount, however, it will be subject to tax. This also applies to gain from selling a vacation home or other secondary residence. 

Note that distributions from retirement plans such as pension plans and IRAs are not subject to the NIIT. However, if these distributions push your AGI above the threshold, they can cause other income types to be taxed. 

Additional 0.9% Medicare tax

In addition to the 1.45% Medicare tax that applies to all wage earners, some high wage earners are subject to an additional 0.9% Medicare tax. This applies to wages that exceed: 

  • $250,000 for joint filers
  • $125,000 for married individuals filing separately
  • $200,000 for all others 

Note that this tax only applies to employees—not employers. 

The employer must begin withholding the additional 0.9% Medicare tax once their employee’s wages for the year reach $200,000. However, if the employee (or the employee’s spouse) has additional wage income from another job, this may prove insufficient. Instead, the employee may file a new W-4 with the employer to request extra income tax withholding. 

How does the extra Medicare tax affect self-employment income? 

In addition to the regular 2.9% self-employment Medicare tax, the additional 0.9% Medicare tax applies to self-employment income for the tax year that exceeds the same amounts as wage earners—note, however, that the $250,000, $125,000, and $200,000 thresholds are modified according to the self-employed taxpayer’s wage income. 

Work with our tax advisors

Income taxes can be complicated, especially when they vary from year to year. Is your income high enough that you owe these extra taxes? Contact us to discuss your taxes and their implications with a qualified tax professional.

© 2022

end-of-year-tax-planning-ideas-for-small-business-owners

End-of-Year Tax Planning Ideas for Small Business Owners
End-of-Year Tax Planning Ideas for Small Business Owners 1600 941 smolinlupinco

As we approach the last few months of the calendar year, it’s time to start thinking about ways to reduce your small business taxes. 

Deferring income and accelerating deductions to minimize taxes—the standard year-end approach—will likely give your business the best results. This also applies to bunching deductible expenses into this year and next to minimize their tax value. 

That said, those expecting to be in a higher tax bracket may get better results with an opposite strategy—for example, pulling income into the current year to be taxed at lower rates, while deferring deductible expenses until next year to offset higher-taxed income. 

Some additional ideas include: 

QBI deduction

Non-corporation taxpayers may be entitled to a qualified business income (QBI) deduction of up to 20%. If taxable income is higher than $340,100 for married couples filing jointly, or half that amount for others, the deduction may be limited (and phased in) based on: 

  • Whether the taxpayer is involved in a service-type business such as law, health, or consulting
  • The amount of W-2 wages paid by the business 
  • The unadjusted basis of qualified property held by the business, such as machinery and equipment

By deferring income, accelerating deductions to keep income under the thresholds, or increasing W-2 wages before the end of the year, taxpayers may be abe to to keep some or all of the QBI deduction. 

Cash vs. accrual accounting

Taxpayers must satisfy a gross receipts test in order to qualify as a small business. For 2022, this means that average annual gross receipts can’t exceed $27 million during a three-year testing period—ot that long ago, that amount was only $5 million. 

Compared to previous years, more small businesses are now able to use the cash accounting method for federal tax purposes, rather than accrual accounting. Cash method taxpayers may find that by holding off billings until next year, paying bills early, or making select prepayments, it is easier to defer income. 

Section 179 deduction

As a small business taxpayer, you may want to consider making expenditures that qualify for the Section 179 expensing option. Expensing is typically available for depreciable property—other than buildings—including equipment, off-the-shelf computer software, interior building improvements, HVAC, and security systems. 

For 2022, the expensing limit is $1.08 million with an investment ceiling of $2.7 million. This means that many small and medium-sized businesses will be able to deduct most or all of their expenditures for machinery and equipment—and that deduction isn’t prorated for the amount of time an asset is in service. If you place eligible property in service by the end of 2022, you can claim a full deduction for the year. 

Bonus depreciation

If qualified improvement property, machinery, and equipment is purchased and placed in service this year, businesses can generally claim a 100% bonus first-year depreciation deduction. 

As with the Section 179 deduction, this full write-off is an option regardless of how long those qualifying assets are in service in 2022. 

Develop a year-end tax plan with us

Tax rules can be complex, so it’s best to consult with a professional before acting. Contact us to work with an experienced tax professional to develop the best tax-saving strategies for your business.

© 2022

using-a-split-annuity-as-a-balanced-approach-to-retirement-and-estate-planning

Using a Split Annuity as a Balanced Approach to Retirement and Estate Planning
Using a Split Annuity as a Balanced Approach to Retirement and Estate Planning 1600 941 smolinlupinco

Maintaining your standard of living while trying to preserve your wealth for loved ones is a tightrope walk, something you’re probably aware of if you’re close to retiring or already enjoying this milestone in life. Finding a balance between these two goals is especially challenging since your retirement years could span decades. A way to maintain your income stream and hold onto financial assets is by investing in a split annuity.  

The Basics of an Annuity

In a nutshell, an annuity is an investment contract with tax advantages that you hold with an insurer or financial services company. You have the option to pay your premiums annually or by lump sum, and your service will pay over a set term or a lifetime in return. 

For purposes of the split annuity strategy covered below, we’ll highlight “fixed” annuities. These typically provide participants with a guaranteed minimum return rate. There are other annuities options, including “variable” and “equity-indexed,” which are more volatile but have significant upside potential compared to fixed products. 

Annuities can fall into two categories: immediate or deferred. Immediate annuities give you payouts immediately, whereas deferred options begin paying at a predetermined future date. 

Another consideration for annuity earnings is that they are tax-deferred. This means they will increase in value, tax-free until paid or withdrawn. Every payment will have a portion dedicated to standard income tax rates, and the remainder is considered a tax-free return of principal (premiums). 

Deferred annuities tend to grow faster than comparable accounts because of their ability to accumulate earnings on a tax-deferred basis. This perk offsets the modest interest rates they usually offer.

Another feature of annuities that make them attractive is the flexibility of reallocating or withdrawing funds according to your circumstances. Keep in mind that you may have to pay early withdrawal or surrender charges depending on how much you take and at what point this occurs in the annuity’s lifecycle.

Understanding the Split Annuity Strategy

Split annuities are not a single product, but rather two that are often funded by a single investment source. Most split strategies will involve using some of your funds to purchase an immediate annuity, making fixed payments over a specific term, such as 15 years. The funds you have left over then get invested in a deferred annuity that won’t pay out until the initial period has ended. 

The outcome is that once your immediate annuity term has ended, you will have accumulated enough earnings in your deferred annuity to equal what you originally invested. Essentially, if set up correctly, your split annuity will create a fixed income stream for several years that preserves your principal. 

Once the term has ended, reassess what options you have available. For instance, you might decide to have your deferred annuity start sending you payments, reinvest in another split annuity, withdraw a portion of the entire cash value it holds, or consider another investment option altogether. 

If you’d like to learn more about split annuities, reach out to us. We are eager to help you determine the best strategy for your retirement situation. 

© 2022

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