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Vol. 4 Issue 10


Avoiding the 3.8% Medicare Surtax


You are probably already aware of the 3.8% Medicare tax on net investment income that began in 2013 because it has been widely publicized and discussed. What you may not know is that you can avoid or reduce the tax through a gift to ASHRAE Foundation.


Let's review how the Medicare surtax works. Not everyone is subject to the tax, only those who have an adjusted gross incomes of $250,000 for married couples filing joint returns and $200,000 for single filers.


The surtax does not apply to salary income, only net investment income which generally means interest, dividends, annuities, royalties, and rents and any other passive income. That means the surtax only applies if you have net investment income and your adjusted gross income exceeds the applicable threshold amounts mentioned above.


With the increase in the top income tax rates to 39.6% on ordinary income and 20% on long-term capital gain income, and the imposition of the new 3.8% tax, individuals, estates, and trusts now face a substantial tax of up to 43.4% on ordinary investment income and 23.8% on long-term capital gain income.


Charitable Giving and the Medicare Surtax


A gift to ASHRAE Foundation could help you avoid the Medicare surtax. There are charitable planning techniques you can use to avoid, minimize, or defer the 3.8% Medicare surtax.


First, consider a gift of appreciated property such as publicly traded securities to ASHRAE Foundation by December 31, 2013. Gifts of appreciated property to ASHRAE Foundation have two benefits. First, you are entitled to an income tax charitable deduction equal to the fair market value of the securities donated. That reduces your taxable income. Also, you avoid the investment income associated with the securities that could subject you to the Medicare surtax. An outright gift to ASHRAE Foundation of appreciated property that produces investment income shifts that income to the Foundation.


Another strategy to consider is to fund a charitable remainder trust (CRT) with appreciated securities. A CRT is a tax-exempt trust that can make lifetime payments to you and your spouse. After the trust stops making payments, the remaining principal can be transferred to ASHRAE Foundation to support our work of advancing the HVAC & R profession.


If you have investments that have appreciated significantly you can transfer your investment to a CRT and the CRT can sell it without triggering the capital gain tax and the Medicare surtax. Although payments from a CRT are taxable, the use of a CRT may result in the elimination, reduction, or at the very least, the deferral, of the 3.8% tax on investment income realized by the CRT.


How Can You Take Advantage of These Tax-saving Strategies?


If you would like to make a gift of appreciated securities before year end, contact ASHRAE Foundation using the information below for transfer instructions. If you want to learn how a charitable remainder trust might help you, contact ASHRAE Foundation for an illustration of the benefits of a charitable remainder trust and how to establish such a trust.

You may contact Margaret Smith regarding the gift opportunities described here and all gifts to the ASHRAE Foundation by email, tel: 678-539-1201.


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