The new 3.8% surtax on unearned income that took effect on January 1, 2013, applies to individuals with Modified Adjusted Gross income (MAGI) in excess of $200,000 and couples with MAGI in excess of $250,000. Of course, the tax tail should never wag the dog, but here are some strategies that might help you minimize the tax bite:
Consider municipal bonds. Tax-exempt munis may be more appropriate than other income-producing securities.
Re-consider exposure to dividend-paying stocks. Together, the American Tax Relief Act of 2012 (ATRA) that increased the top capital gains rate from 15% to 20% and the 3.8% Surtax have raised the tax on dividends for high-income taxpayers from 15% to 23.8%. Therefore, dividends are not as tax efficient as they once were.
Max-out contributions to tax-deferred retirement plans. These qualified plans allow your savings to grow tax-deferred. If you have self employment income, consider setting up a SEP IRA or an individual 401(k) to shelter more growth.
Use college savings accounts. Save for education using Section 529 plans and Coverdell Education Savings Accounts where your contributions grow tax deferred and qualified withdrawals are tax free.
Convert passive income to salary. If you have an actively managed entity, this move could mean some income still might be subjected to the 0.9% tax, but it could reduce the 3.8% surtax.
Consider installment sales. Choosing to defer income over several years could keep you under the MAGI limit and minimize the surtax.
Of course, you should consult your financial advisor and CPA to discuss the full ramifications of any of these strategies.