cut and pastes from other newsgroup and a CPA's web page, questions are my own.
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NYTimes - What some investors Are Doing To Anticipate Tax Increase Nice article in NYTimes by Paul Sullivan. He talks about some of the specific tax increases that are on their way to happening (unless Congress and the Prez do something about them), and what some folks are doing to deal with it.
"He is making a bigger change with his real estate holdings. Mr. Beeman said his wife would start to actively manage the properties they rent out. He says he believes that by doing this, the rents will no longer be categorized as passive income, which is subject to the surtax. "If you have one town house generating a couple of thousand dollars a year, it's probably not worth it," he said. "If you have 10 properties and each one is generating $15,000 in net income, then it is worthwhile. It's a matter of size and if you have the time and ability to do it." "
Explain this. If rental income is no longer passive income, is it not subject to SE tax? What is the benefit in their strategy?
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Reducing the 3.8% Anti-Investment tax Our goal to reduce this tax is two-fold: Reducing income (AGI) to less than the base amount, and/or reducing or replacing investment income with income that is not considered investment income.
1.. Again, our opening strategy for business owners is to convert to "S" corporations. Once converted, pay a reasonable salary and remove other profits as non-salary distributions. An old court case, Pediatric Surgical Associates TC Memo 2011-81), established that profits attributable to non-shareholders may be withdrawn as distributions, but make sure to not get too aggressive. Because the distributions from "S" corporations are not considered investment income, this surtax is avoided, and the earned income surtax is also avoided. Caution-this strategy does not work if the shareholders are not actively involved in the business. ______________________________________________________________Taxpayer has an LLC, with rental property that produces hefty taxable income. She could probably meet the test for active participation if a few changes were made. How would this benefit her taxes?