The 3.8% is assessed on the lesser of net investment income or the amount of modified adjusted gross income over the threshold. Net investment income is investment income minus certain expenses and includes interest, dividends, capital gains, annuities, rents, royalties and passive activity income. It does not include active trade or business income, distributions from IRAs or other qualified retirement plans, or income considered for self-employment taxes.
Keeping income below the threshold will be a key line of attack. Ways to do that include stashing money in qualified retirement plans and tax-exempt or tax-deferred investments including municipal bonds. Non-qualified deferred compensation, life insurance policies and oil and gas investments are other ideas, according to advisors.
People should convert IRAs to Roth IRAs to keep investment income down, according to Barry C. Picker, a certified public accountant at Picker & Auerbach CPAs, P.C. in Brooklyn, N.Y. The money the taxpayer pays to do the conversion won't be producing investment income in the future, and the Roth will produce a tax-free income stream, Picker says.
Copyright © 2010 Dow Jones & Company Inc.
Estate Planning? More Americans Say 'No Thanks'
The number of Americans with estate planning documents fell significantly last year, and most of the blame lies with the recession.
According to a recent survey released on the Web site Lawyers.com, the number of respondents who said they possessed estate planning documents such as wills, trusts or power of attorney decreased significantly from the prior survey conducted in 2007. In the latest survey, just 35% of respondents said they had wills, 29% said they had a power of attorney and only 18% had a living trust or other trust agreement.
It appears that recent economic doldrums have dented many people's wallets and psyches. In the Wills & Estate Planning survey of 1,022 people conducted by Harris Interactive, 71% said it's more important to save money for immediate needs than on long-term estate planning. Similarly, 73% said that economic hard times made it harder for them to plan for the future. In addition, 9% said they don't want to think about dying or becoming incapacitated.
The survey found that affluent Americans (defined as household income of greater than $50,000) are significantly more likely to have estate planning documents. Whether or not they've updated them is another matter.
Martin Shenkman, an estate and tax planning attorney in Paramus, N.J., says he has one wealthy client in Florida who took a big hit when that state's real estate market tanked. "She had a lot of specific requests in her will, and I'm not sure she now has enough money to cover them," he says. "There are other people like that who, if they don't revise their documents, will have an ugly mess after they pass away."
He notes the vast majority of his clients did nothing about their estate planning needs during the downturn. And the confusion caused by the federal estate tax repeal in 2010-and its uncertain future-didn't help. "People are saying 'Congress can't even figure out what the rules are, so why should I spend money on something when I don't even know what it will be,'" Shenkman says.
Investors Seek More Advice
Retirement assets recovered nicely last year, and as assets rose so did the number of people who said they needed financial advice, according to a study by Spectrem Group.