Explore the New IRS Form for Net Investment Income Tax

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Bob Keebler goes line by line through Form 8960, Net Investment Income Tax for Individual, Estates and Trusts, to help members understand key elements they need to know for tax season.

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Explore the New IRS Form for Net Investment Income Tax

  1. 1. IRS Form 8960: Draft Instructions Issued January 6, 2014, Webinar on January 8, 2014 Presented by: Robert S. Keebler, CPA, MST, AEP Keebler & Associates LLP To print draft Form 8960 go to: http://www.irs.gov/pub/irs-dft/f8960--dft.pdf © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved
  2. 2. Introduction About the PFP Section & PFS Credential • The AICPA PFP Section provides information, resources, advocacy and guidance for CPAs who specialize in providing estate, tax, retirement, risk management and investment planning advice to individuals and their closely held entities (learn more at aicpa.org/PFP) • The CPA/Personal Financial Specialist (PFS) credential distinguishes CPAs as subject-matter experts who have demonstrated their financial planning knowledge through experience, education and testing (learn more at aicpa.org/PFS) American Institute of CPAs® Personal Financial Planning Section 2
  3. 3. Introduction Robert S. Keebler, CPA, MST, AEP Robert.Keebler@KeeblerandAssociates.com 920-593-1700 American Institute of CPAs® Personal Financial Planning Section 3
  4. 4. Form 8960 – Part 1 American Institute of CPAs® Personal Financial Planning Section 4
  5. 5. Line 1 Taxable Interest • Form 1040; Line 8A; or Form 1041; Line 1 Interest income earned in the ordinary course of your non-section 1411 trade or business is excluded from net investment income. If line 1 includes self-charged interest income received from a partnership or S corporation that is a nonpassive activity see the Line 7 instructions for a possible adjustment to net investment income. American Institute of CPAs® Personal Financial Planning Section 5
  6. 6. Line 2 Ordinary Dividends • Form 1040; Line 9A; or Form 1041; Line 2A Note: • If line 2 includes dividends from employer securities held in an employee stock ownership plan (ESOP) that are deductible under section 404(k) or Alaska Permanent Fund Dividends, include those amounts as negative modifications on line 7. American Institute of CPAs® Personal Financial Planning Section 6
  7. 7. Line 3 Annuities from Non-Qualified Plans • Enter the gross income from all annuities received from nonqualified plans. Distributions from the following annuities/retirement plans are not included in calculating your net investment income: • Section 401- Qualified pension, profit-sharing, and stock bonus plans; • Section 403(a) - Qualified annuity plans purchased by an employer for an employee; • Section 403(b) - Annuities purchased by public schools or section 501(c)(3) tax-exempt organizations; • Section 408 - Individual Retirement Accounts; • Section 408A - Roth IRAs; and • Section 457(b) – Deferred compensation plans of a State and local government and tax-exempt organization. American Institute of CPAs® Personal Financial Planning Section 7
  8. 8. Line 4A & Line 4B Line 4A: Rental Real Estate, Royalties, partnerships, S Corporations, trusts, etc. • Form 1040; Line 17; or Form 1041; Line 5 Line 4B:Adjustment for net income or loss derived in the ordinary course of a nonsection 1411 trade or business. American Institute of CPAs® Personal Financial Planning Section 8
  9. 9. Line 4B (continued) Enter the net positive or net negative amount for the following items included in line 4a that are not included in determining NII: • Net income or loss from a section 162 trade or business that is not a passive activity and is not engaged in a trade or business of trading financial instruments or commodities, • Net income or loss from a passive section 162 trade or business activity that is taken into account in determining self-employment income, • Royalties derived in the ordinary course of a section 162 trade or business that is not a passive activity, and • Passive losses of a former passive activity that are allowed as a deduction in the current year by reason of section 469(f)(1)(A). American Institute of CPAs® Personal Financial Planning Section 9
  10. 10. Line 4B (continued) & Line 4C Line 4B: • In addition, use line 4b to adjust for certain types of nonpassive rental income or loss derived in the ordinary course of a section 162 trade or business. - See the instructions for examples of what items line 4B includes; i.e., self-rentals, real estate professional safe harbor, etc. Line 4C: Combine lines 4A and 4B. American Institute of CPAs® Personal Financial Planning Section 10
  11. 11. Line 5A Net gain or loss from disposition of property • From form 1040, combine lines 13 and 14; or from form 1041, combine lines 4 and 7. Generally, the general income tax rules in IRC chapter 1 will determine whether there has been a disposition of property for the NIIT purposes. Generally, the term disposition means a: • Sale, Exchange, Transfer, Conversion, Cash settlement, Cancellation, Termination, Lapse, Expiration, Deemed disposition, for example under section 877A, or Other disposition. If you incur gain or loss from a disposition that is not reported on Form 1040, lines 13 and 14, or Form 1041, lines 4 and 7, report those gains on Form 8960, line 7. American Institute of CPAs® Personal Financial Planning Section 11
  12. 12. Line 5B Net gain or loss from disposition of property that is not subject to net investment income tax. Gains and losses that are not taken into account in computing taxable income are not taken into account in computing net investment income. • For example, gain that is not taxable by reason of section 121 (sale of a principal residence) or section 1031 (likekind exchanges) is not included in net investment income. American Institute of CPAs® Personal Financial Planning Section 12
  13. 13. Line 5B (continued) Use line 5b to adjust the amounts included on line 5a for gains and losses that are excluded from the calculation of net investment income. Enter the amount of gains (as a negative number) and losses (as a positive number) included on line 5a that are excluded from net investment income. • See the instructions for examples of amounts that line 5b may include. American Institute of CPAs® Personal Financial Planning Section 13
  14. 14. Line 5C & Line 5D Line 5C: • Adjustment from disposition of partnership interest or S Corporation stock. • Enter the amount from the worksheet provided for in the instructions for Lines 5a-5d, Part II, line 3d. • Attach a statement as described in the Required statements part of the instructions to your return for the year of the disposition. Line 5D: • Combine lines 5A, 5B, and 5C See Lines 5a-5d – Net Gains and Losses Worksheet in the instructions. American Institute of CPAs® Personal Financial Planning Section 14
  15. 15. Line 6 Changes to investment income for certain CFCs and PFICs If you own stock, directly or indirectly, in a CFC or a PFIC (other than certain CFCs and PFICs held in a section 1411 trade or business), use line 6 for adjustments necessary to calculate your net investment income. American Institute of CPAs® Personal Financial Planning Section 15
  16. 16. Line 7 & Line 8 Line 7: • Other modifications to investment income. • Use line 7 to report additional net investment income modifications to net investment income that are not otherwise specified in lines 1-6. • See the instructions or examples of additions and modification to net investment income that should be reported in line 7. • See the instructions for a Line 7 – Deduction Recoveries Worksheet. Line 8: • Total Investment Income • Combine Lines 1, 2, 3, 4C, 5D, 6, and 7 American Institute of CPAs® Personal Financial Planning Section 16
  17. 17. Form 8960 - Part 2 and 3 American Institute of CPAs® Personal Financial Planning Section 17
  18. 18. Line 9A Investment Interest Expenses Enter on Form 8960, line 9a, interest expense you paid or accrued during the tax year from either Schedule A (Form 1040), line 14 or the amount from Form 4952, line 8. Observation: The Investment Interest Expense deduction allowed by Section 163 IS NOT subject to EITHER the 2% Floor (Section 67) or 3% Pease (Section 68) limitations. American Institute of CPAs® Personal Financial Planning Section 18
  19. 19. Line 9B State Income Tax Include on line 9b any state or local income taxes, or foreign income taxes you paid which are attributable to net investment income. • This may be all or part of the amount you reported on Schedule A (Form 1040), line 5a (or Form 1041, line 11). • For purposes of line 9b, sales taxes are not deductible in computing net investment income. Observation: State Income Tax deductions ARE subject to the 3% Pease (Section 68) limitation but NOT the 2% Floor (Section 67) limitation. American Institute of CPAs® Personal Financial Planning Section 19
  20. 20. Line 9C & Line 9D Line 9C: • Miscellaneous Investment Expenses • Investment expenses you incur that are directly connected to the production of investment income are deductible expenses in determining your net investment income. - Generally, these amounts are reported on Form 4952, line 5. - As in the case with line 5 of Form 4952, the amounts reported on line 9c are the amounts allowable after the application of the deduction limitations imposed by sections 67 and 68. Observation: The Miscellaneous Investment Expense deduction allowed IS subject to the 2% Floor (Section 67) or 3% Pease (Section 68) limitations. Line 9D: • Add lines 9A, 9B, and 9C American Institute of CPAs® Personal Financial Planning Section 20
  21. 21. Line 10 Line 10: • Additional Modifications • Use line 10 to report additional deductions and modifications to net investment income that are not otherwise reflected in lines 1-9. - See the instructions for properly allocable deductions to report on line 10. • Enter amounts on line 10 as positive numbers. • See the instructions for Lines 9 and 10 – Application of Itemized Deduction Limitations on Deductions Properly Allocable to Investment Income Worksheet. American Institute of CPAs® Personal Financial Planning Section 21
  22. 22. Line 11 & Line 12 Line 11: • Total Deductions and Modifications • Add lines 9D and 10 Line 12: • Net Investment Income. - Subtract Part 2, Line 11 from Part 1, Line 8. - If 0 or less, enter 0. American Institute of CPAs® Personal Financial Planning Section 22
  23. 23. Individuals & Estates/Trusts Individuals complete lines 13-17 Estates/trusts complete lines 18A-21 American Institute of CPAs® Personal Financial Planning Section 23
  24. 24. Individuals American Institute of CPAs® Personal Financial Planning Section 24
  25. 25. Line 13 Modified Adjusted Gross Income If you did not exclude any amounts from your gross income under section 911 and you do not own a CFC or PFIC, your MAGI is your AGI as reported on Form 1040, line 38. If you exclude amounts under section 911 or own certain CFCs or PFICs, your MAGI is your AGI as modified by certain rules described in Regulations section 1.1411-10(e)(1). See Instructions for a Line 13 – MAGI Worksheet American Institute of CPAs® Personal Financial Planning Section 25
  26. 26. Line 14 The threshold amount is based on your filing status. Filing Status Married Filing Jointly Qualified Widower with Dependent Child Married Filing Seperately Single or Head of Household American Institute of CPAs® Threshold Amount $ 250,000.00 $ 250,000.00 $ 150,000.00 $ 200,000.00 Personal Financial Planning Section 26
  27. 27. Line 15 & Line 16 Line 15: • Subtract line 14 from line 13. • If 0 or less, enter 0. Line 16: • Enter the smaller of line 12 or line 15. American Institute of CPAs® Personal Financial Planning Section 27
  28. 28. Line 17 Net Investment Income Tax for individuals. • Multiply line 16 by 3.8%. • Enter here and in Form 1040, line 60. American Institute of CPAs® Personal Financial Planning Section 28
  29. 29. Estates/Trusts American Institute of CPAs® Personal Financial Planning Section 29
  30. 30. Line 18 A) Net Investment Income • Line 12 B) Deductions for distributions of net income and deductions under section 642(C). C) Undistributed net investment income. • Subtract line 18B from 18A. American Institute of CPAs® Personal Financial Planning Section 30
  31. 31. Line 19A Adjusted Gross Income Guidance on calculating an estate or trust's AGI for regular tax purposes can be found in the instructions to Form 1041, line 17. • If the estate or trust does not own a CFC or PFIC, enter the estate or trust's AGI for regular tax purposes. • If the estate or trust owns a CFC or PFIC, the trust or estate may need to modify its regular tax by making adjustments with respect to income derived from certain CFCs and PFICs. American Institute of CPAs® Personal Financial Planning Section 31
  32. 32. Line 19B & Line 19C Line 19B: • Highest tax bracket for estates and trusts for the year. • For the highest tax bracket for estates and trusts for the year, see Form 1041, Schedule G instructions for the tax rate schedule. Line 19C: • Subtract line 19B from 19A • If 0 or less, enter 0. American Institute of CPAs® Personal Financial Planning Section 32
  33. 33. Line 20 & Line 21 Line 20: • Enter the smaller of either line 18C or 19C. Line 21: • Net Investment Income Tax for Estates and Trusts. • Multiply line 20 by 3.8%. • Enter here and on form 1041, schedule G, line 4. American Institute of CPAs® Personal Financial Planning Section 33
  34. 34. Appendix American Institute of CPAs® Personal Financial Planning Section 34
  35. 35. Netting Losses for NIIT Final Reg.§1.1411-4(d) American Institute of CPAs® Personal Financial Planning Section 35
  36. 36. Example – Regular Tax Sale of Business (LTCG) $100,000 Portfolio Loss (LTCL) ($60,000) Net LTCG American Institute of CPAs® $40,000 Personal Financial Planning Section 36
  37. 37. Example – Net Investment Income Tax Sale of Business (LTCG) Portfolio Loss (LTCL) Net Investment Income Excluded from NII ($60,000) $0 *NII can never be a negative number. The computation ends at zero. The $60,000 loss is lost forever and cannot be carried forward. American Institute of CPAs® Personal Financial Planning Section 37
  38. 38. Sections 67 & 68 Limitations for NIIT American Institute of CPAs® Personal Financial Planning Section 38
  39. 39. Sections 67 & 68 Limitations – Regular Income Tax Purposes Section 67 – 2% Floor on Miscellaneous Itemized Deductions: For regular income tax purposes, the miscellaneous itemized deductions are only allowed to the extent that the aggregate of such deductions exceeds 2% of AGI. Section 68 – Overall Limitation on Itemized Deductions: For regular income tax purposes, Pease cuts itemized deductions by 3% of AGI above a certain threshold amount (up to a maximum of 80%). American Institute of CPAs® Personal Financial Planning Section 39
  40. 40. Sections 67 & 68 Limitations – Net Investment Income Tax Purposes Any deduction allowed against net investment income that, for purposes of computing your regular income tax, is subject to either the 2% floor on miscellaneous itemized deductions (section 67) or the overall limitation on itemized deductions (section 68) is allowed in determining net investment income, but only to the extent the items are deductible after application of both limitations. American Institute of CPAs® Personal Financial Planning Section 40
  41. 41. Miscellaneous Itemized Deductions – Net Investment Income Tax Purposes The amount of your miscellaneous itemized deductions, after application of the 2% floor but before application of the overall limitation, used in determining your net investment income is the lesser of: • That portion of your miscellaneous itemized deductions before the application of the 2% floor that is properly allocable to net investment income, or • Your total miscellaneous itemized deductions allowed after the application of the 2% floor but before the application of the overall limitation on itemized deductions. American Institute of CPAs® Personal Financial Planning Section 41
  42. 42. Itemized Deductions – Net Investment Income Tax Purposes The amount of your itemized deductions allowed in determining your net investment income after applying both the 2% floor and overall limitation is the lesser of: • The sum of: - 1. The amount of your miscellaneous itemized deductions allowed as a deduction against your net investment income (before application of the overall limitation), and - 2. The total amount of your itemized deductions that are not subject to the 2% floor and are properly allocable to items of income or net gain for purposes of determining your net investment income, or • The total amount of your itemized deductions allowed after the application of both the 2% floor and the overall limitation on itemized deductions. American Institute of CPAs® Personal Financial Planning Section 42
  43. 43. Itemized Deductions – Net Investment Income Tax Purposes Example • Gary and Barbara have a passive interest in a number of investments which generate investment income of $50,000. Assume the Surtax applies to NII. • $5000 of expenses attributable the investments are miscellaneous expenses. • $25,000 of expenses attributable the investments are itemized deductions not subject to the 2% floor. • Matt and Mary in total will itemize $50,000 in deductions after taking into account the 2% limitation on miscellaneous deductions and reducing their deductions for PEASE. • A deduction of $30,000 ($25,000+$5000<$50,000) is allowed against NII. American Institute of CPAs® Personal Financial Planning Section 43
  44. 44. Required Disclosure Under Circular 230 Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to any other party. For discussion purposes only. This work is intended to provide general information about the tax and other laws applicable to retirement benefits. The author, his firm or anyone forwarding or reproducing this work shall have neither liability nor responsibility to any person or entity with respect to any loss or damage caused, or alleged to be caused, directly or indirectly by the information contained in this work. This work does not represent tax, accounting, or legal advice. The individual taxpayer is advised to and should rely on their own advisors. American Institute of CPAs® Personal Financial Planning Section 44
  45. 45. Resources for Post-ATRA & NIIT Planning Planning After ATRA and the Net Investment Income Tax Toolkit • • • aicpa.org/pfp/proactiveplanning Complimentary PFP Section member/PFS credential holder benefit Includes Bronze Edition of Tax Evaluator, infographic on tax brackets, planning ideas to use in client meetings, client communication templates, webcast/podcast archives, and more! Other Resources for Purchase from Bob Keebler (www.cpa2biz.com) • • Tax Planning After the Healthcare Surtax: Tools, Tips, and Tactics* The Rebirth of Roth: A CPA's Ultimate Guide for Client Care* Now Available! More Resources for Purchase from Bob Keebler* (www.cpa2biz.com) • • Planning Opportunities After ATRA: Tools, Tips, and Tactics (PTX1307M) Tax Rate Evaluator: A Graphical Calculator for Tax Planning After ATRA (PTX1306M) Visit aicpa.org/pfp/join to become a member *discounts available for PFP/PFS members American Institute of CPAs® Personal Financial Planning Section 45

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