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William Perez

Avoid the Medicare Surtax by Giving Incoming-Producing Investments to Minor Children

By September 18, 2012

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Individuals who are concerned about the new 3.8% Medicare tax on net investment income that takes effect in the year 2013 may want to consider giving investment assets to their children or other family members who won't be subject to the new Medicare tax.

This year-end tax planning tactic was suggested by Rick Bailine, who was quoted in an Accounting Today article discussing the merits of taking advantage of the generous gift tax rules in effect for 2012. Bailine points out that parents can avoid the unearned income Medicare contribution tax by giving fixed income assets to their children. Bailine is quoted as saying, "If you give an income-producing asset to your minor child, the kiddie tax becomes operative -- but the 3.8 percent tax on investment income imposed by the Affordable Care Act is not subject to the [kiddie] tax."

This tax planning technique likely will be used by parents who will likely be subject to the 3.8% Medicare surtax on their investment income and who are willing to relinquish control over those investments by giving them to their children. The tactic simply involves transferring title of the donor's incoming-producing assets such as bonds and dividend-paying stocks to their children. When investments are given, the recipient of the gift becomes responsible for reporting and paying tax on the income.

Starting in 2013, the unearned income Medicare contribution tax applies an additional tax of 3.8% to investment income such as dividends and interest if adjusted gross income exceeds $200,000 for unmarried persons or exceeds $250,000 for married persons. Giving investment assets to their minor children, parents can shift the investment income to the children's tax returns. Although the child's investment income can still be taxed at the parent's tax rate under the "kiddie tax" rules, the income can avoid the new 3.8% Medicare tax since the child's adjusted gross income is likely to be under the thresholds that trigger the additional Medicare tax.

The tactic can be used by wealthier persons who may want to use this in combination with their estate and gift tax strategies.

People considering this particular year-end tactic should model out the income taxes as well as consider how this fits in with their financial planning and estate planning goals.

If you have a year-end tactic you'd like to share, I'd like to hear from you. Feel free to contact me.

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