Investment Income Tax

A lot of hand wringing has gone on over the new 3.8% Medicare investment tax. To oversimplify, for those with higher levels of income, investment income (such as dividends and interest income, capital gains and rental income) is subject to an extra 3.8% tax. As a result, much has been written and said about how to try to avoid it, and the horrors that befall those who fail to do so. Examples to avoid it include investing in municipals, which are exempt from this tax. 

Not to minimize or downplay any additional tax, but as has been the case for many things where there has been change, there is the typical overreaction and doomsday crying. Let’s put this in perspective – if you have $10,000 of dividend and interest income, and capital gains, what you’re looking at (assuming you have a high enough income and everything else qualifies) is an additional tax of $380.   If you’re a heavy hitter and you have $100,000 of dividends, interest and capital gains, and any other investment income, you’re looking at an additional tax of $3,800. Again, not to downplay the out-of-pocket, the reality is, we’re not talking a huge hit. 

My point in this is to urge that your investment decisions not be guided by whatever convoluted, twisting and turning is recommended to avoid the tax. Rather, invest the best way you or your advisors know how, and don’t let this tax dictate how you invest. Do some number crunching, get some advice from your professionals. I venture to say that most of the time you will find that the best approach (assuming you’ve already addressed how your money should be invested) is to make no change at all.