Keep the 3.8% Medicare surtax at bay. It applies to net investment income of single filers and heads of household who have modified AGIs above $200,000… $250,000 for couples and $125,000 for marrieds filing separately. The tax is due on the lesser of net investment income or the excess of modified AGI over the thresholds. Investment income includes taxable interest, dividends, annuities, gains, royalties and passive rental income, but not retirement plan payouts or tax-exempt interest.
Among the ways to minimize the sting of the surtax: Buy municipal bonds. Tax-free interest is exempt from the 3.8% surtax and does not affect the owner’s AGI. If selling property, use an installment sale to spread out a large gain. And, if feasible, do a like-kind exchange of investment realty to defer the gain instead of a taxable sale.