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Understanding the Net Investment Income Tax

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In this presentation, Bob Keebler discusses the impact of the regulations on net investment income tax.

In this presentation, Bob Keebler discusses the impact of the regulations on net investment income tax.

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    Understanding the Net Investment Income Tax Understanding the Net Investment Income Tax Presentation Transcript

    • Understanding the 3.8% NIIT and Its Effect on Individuals, Trusts & Estates, and Closely Held Entities After the Final Regulations and Second Set of Proposed Regulations Presented by: Robert S. Keebler, CPA, M.S.T., AEP
    • Introduction About the PFP Section • 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) About the Tax Section • The AICPA provides tax practice tools to help members elevate their practices and maintain the highest ethical standards. The AICPA also advocates sound tax policy and effective tax administration. American Institute of CPAs® Personal Financial Planning and Tax Sections 2
    • Patient Protection and Affordable Care Act Investment income • To date has never been subject to the Medicare tax • As of 1/1/2013, high-income households will start paying a 3.8% NIIT on at least a portion of their investment income, such as capital gains, dividends, and rental income © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 3
    • Draft Form 8960 © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 4
    • 3.8% Net Investment Income Tax Overview—Individuals Application to individuals The NIIT is equal to: Net investment Income” 1. “Net Investment Income 3.8% X the lesser of OR OR 2. The excess (if any) of— – 2. The excess (if any) of - ““ModifiedAdjusted Gross Income - Modified Adjusted Gross Income - (MAGI) (MAGI) “Threshold amount” “Threshold Amount” See IRC Section 1411(a)(1) and Reg. Section 1.1411-2(b)(1) American Institute of CPAs® © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved Personal Financial Planning and Tax Sections 5
    • 3.8% Net Investment Income Tax Overview—Estates & Trusts Application to estates and trusts The NIIT is equal to: 3.8% X the lesser of Undistributed “net investment 1. “Net investment Income” income” for such taxable year OR OR 2. The excess (if any) of— – 2. The excess (if any) of - ““AdjustedAdjusted Gross Income in - Modified Gross Income” (as defined - (MAGI) 67) for such taxable year, over the Section “Threshold amount” the highest tax dollar amount at which bracket in section 1(e) begins for such a taxable year See IRC Section 1411(a)(2) and Reg. Section 1.1411-3(a)(1) American Institute of CPAs® © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved Personal Financial Planning and Tax Sections 6
    • 3.8% Net Investment Income Tax Overview—Critical Terms Three critical terms associated with the NIIT • “Net investment income” (NII) • “Threshold amount” (TA) • “Modified adjusted gross income” (MAGI) © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 7
    • 3.8% Net Investment Income Tax Overview—NII Net investment income Includes: • Interest • Dividends • Annuity Distributions • Royalties • Income derived from passive activity • Net capital gain derived from the disposition of property • Salary, wages, or bonuses • Distributions from IRAs or qualified plans • Any income taken into account for selfemployment tax purposes • Gain on the sale of an active interest in a partnership or S corporation • Items which are otherwise excluded or exempt from income under the income tax law, such as interest from taxexempt bonds, capital gain excluded under IRC 121, and veterans benefits Rents • Does NOT Include: See Reg. Section 1.1411-4(a) American Institute of CPAs® © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved Personal Financial Planning and Tax Sections 8
    • 3.8% Net Investment Income Tax Overview Properly Allocable Deductions • Specifically listed in Reg. § 1.1411-4(f) • Reg. § 1.1411-4(f)(3)(iii): State Income taxes are deductible - Planning Point: Timing the payment of state income taxes © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 9
    • 3.8% Net Investment Income Tax Overview—Threshold Amount “Threshold amount” • Is the key factor in determining the “lesser of” formula for purposes of calculating the NIIT Threshold amounts • Single taxpayers—$200,000 Are NOT Inflation Protected • Married taxpayers—$250,000 • Married filing separate--$125,000 • Estates/trusts—$11,950 (inflation protected) - i.e. top income tax bracket in 2013 See Reg. Section 1.1411-2(d) American Institute of CPAs® © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved Personal Financial Planning and Tax Sections 10
    • §1411 Final Regulations On November 26, 2013, the IRS issued final regulations on the 3.8% Net Investment Income Tax © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 11
    • Final Regulations Table of Contents Section 1.1411-1: General Rules Section 1.1411-2: Application to Individuals Section 1.1411-3: Application to Estates and Trusts Section 1.1411-4: Definition of Net Investment Income Section 1.1411-5: Trades and Businesses to Which Tax Applies Section 1.1411-6: Income on Investment of Working Capital Subject to Tax © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 12
    • Final Regulations Table of Contents Section 1.1411-7: Exception for Dispositions of Certain Active Interests in Partnerships and S Corporations [Reserved] Section 1.1411-8: Exception for Distributions From Qualified Plans Section 1.1411-9: Exception for Self-Employment Income Section 1.1411-10: Controlled Foreign Corporations and Passive Foreign Investment Companies © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 13
    • §1411 Final Regulations Overview Some of the highlights: • The Final Regulations finalize the 2012 Proposed Regulations • Net losses are now allowed against the NIIT • Self-charged interest will not be subject to the NIIT (however, there are limitations) • Self-charged rental income will not be subject to the NIIT © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 14
    • §1411 Final Regulations Overview Some more of the highlights: • If a person is a real estate professional, the NIIT will not apply if they meet the 500 hour test • Additional deductions will be allowed against the NIIT, including valuation expenses and NOL originating after 2012 • NOLs will be limited to the lessor of the NIIT or 1040 NOL © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 15
    • §1411 Final Regulations Overview Some more of the highlights: • The taxation of the sale of a partnership or S-Corporation interests have been re-proposed • No regrouping will be allowed at the entity level • Regrouping will be allowed at the 1040 level, with the condition that you are subject to the NIIT • CRTs will now have clearly defined baskets for Chapter 1 and Chapter 2A, including a grandfathered basket © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 16
    • Treas. Reg. §1.1411-5 Trades and Businesses to Which Tax Applies For purposes of the NIIT, “net investment income” includes income from trades and businesses that are • Passive activities (within the meaning of IRC §469) • A trade or business of trading in financial instruments or commodities (as defined in IRC §475(e)(2)) Thus, to the extent that income and/or gains are derived from one of the two situations above, the income and/or gains will be subject to the NIIT See Reg. Section 1.1411-5(a) American Institute of CPAs® © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved Personal Financial Planning and Tax Sections 17
    • Treas. Reg. §1.1411-5 Trades and Businesses to Which Tax Applies Under IRC §1411(c)(2)(A), the term “passive activity” has the same meaning as under IRC §469 Under IRC §469(c)(1), a passive activity is any activity involving a trade or business for which the taxpayer does not “materially participate” • For this purpose, “material participation” is one in which the taxpayer is involved in the operations of the activity on a “regular, continuous and substantial” basis • The Treasury Regulations under IRC §469 go on further to define other situations where a taxpayer can have “material participation” in an activity See Reg. Section 1.1411-5(b) American Institute of CPAs® © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved Personal Financial Planning and Tax Sections 18
    • Treas. Reg. §1.1411-5 Trades and Businesses to Which Tax Applies Therefore, if a) The taxpayer is engaged in an activity which constitutes a trade or business (as defined under IRC §162) and b) The taxpayer “materially participates” in that activity then the NIIT will not apply to that income © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 19
    • Understanding the ‘NIIT’ Code §469 PAL Rules Trade or Business Activity Entity S Corp S Corp Sub-K Entity Sub-K Entity Materially Participate? Yes No Yes No 3.8% Tax No Yes No Yes 0.9% Tax No No Yes No © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 20
    • Treas. Reg. §1.1411-8 Exception for Distributions From Qualified Plans and S Corporations [Reserved] Reg. § 1.1411-8(b)(4)- Employer Securities: • Dividends: Any dividend that is deductible under § 404(k) and is paid in cash directly to a plan participant or beneficiary is a distribution within the meaning of § 1411(c)(5), and thus is not included in NII - This rule does not apply to amounts paid as a dividend after the employer securities have been distributed from a qualified plan © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 21
    • Treas. Reg. §1.1411-8 Exception for Distributions From Qualified Plans and S Corporations [Reserved] Reg. § 1.1411-8(b)(4)- Employer Securities: • Net Unrealized Appreciation (NUA): Any such NUA in employer securities that is realized in a disposition of those employer securities is a distribution within the meaning of § 1411(c)(5), and thus is not included in NII. - Any appreciation in value that occurs subsequent to the distribution of the employer securities from a qualified plan is included in NII when realized. © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 22
    • Real Estate Investments and the NIIT © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 23
    • Unrelated Rental Income (1) Passive Investor ― NIIT will apply (2) Real Estate Professionals without a “trade or business” ― NIIT may apply; safe harbor available (3) Real Estate Professionals with a “trade or business” • NIIT will NOT apply © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 24
    • Real Estate Professionals In the 2012 proposed regulations, in order for income or gain from a real estate rental activity to be immune to the NIIT: (1) the taxpayer was required to be real estate professional and; (2) the income must be derived from a trade or business. "Net Investment Income Tax," 77 Fed. Reg. 72611 (Dec. 5, 2012). © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 25
    • Real Estate Professional Safe Harbor Due to the concerns of commentators, Treasury and the Service decided to add a safe harbor for real estate professionals who may have difficulty meeting the trade or business test. "Net Investment Income Tax; Final and Proposed Rules," 78 Fed. Reg. 72394, 72411-72412 (Dec. 2, 2013). © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 26
    • Real Estate Professional Safe Harbor “The regulations demonstrate a real willingness by the IRS to see the taxpayer’s perspective and expand the scope of issues to consider, compared with earlier proposed regulations.” - Carol A. Cantrell, JD CPA, as quoted in Tax Notes. © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 27
    • Real Estate Professional Safe Harbor The service provided considerable relief by creating an objective standard for when a real estate investor is subject to the net investment income tax. A Real Estate Professional qualifies for the safe harbor if: • They participate more than 500 hours per year, or • Participated more than 500 hours annually in the past five out of ten years. "Net Investment Income Tax; Final and Proposed Rules," 78 Fed. Reg. 72394, 72411-72412 (Dec. 2, 2013). © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 28
    • Real Estate Professional Safe Harbor Scenario. Brian is an investor in a commercial building rented by unrelated parties. Brian’s share of net rental income is $50,000. Brian is single, with MAGI of $300,000 and has no other investment activities. Solution. If Brian is not a real estate professional, $50,000 is subject to NIIT. If Brian is a real estate professional, but does not qualify for the safe harbor nor is the rent derived in the ordinary course of a trade or business, $50,000 is subject to the NIIT. If Brian is a real estate professional and qualifies for the safe harbor he is not subject to the NIIT. If Brian is a real estate professional and the rental income is derived in the ordinary course of a trade or business he is not © 2013 Prepared by Keebler & Associates, LLP subject to the NIIT. All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 29
    • Rental Income & Gain NIIT Immunity Does the NIIT Apply? The investor is not a real estate professional nor is the income derived from a trade of business. YES. The investor is a real estate professional, but neither qualifies for the safe harbor nor is the income derived from a trade or business. YES. The investor is a real estate professional and qualifies for the 500 hour safe harbor. NO. The investor is real estate professional and the income is derived from a trade or business. NO. © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 30
    • Self-Charged Interest Under the proposed regulations, a taxpayer, which lends money to a passthrough entity in which the taxpayer materially participates, would owe NIIT on the interest. However, under the final regulations, a taxpayer is only subject to NIIT on the interest payable by the portion of the entity allocated to other investors. "Net Investment Income Tax; Final and Proposed Rules," 78 Fed. Reg. 72394 (Dec. 2, 2013). © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 31
    • Self-Charged Interest Scenario. Barb owns 60% of an LLC which owns a commercial building rented by unrelated parties. The property generated no rental income, but paid Barb $10,000 in interest on a loan she made to the LLC. Barb is single, with MAGI of $600,000 and has no other investment activities. Solution. Barb will owe NIIT on $4,000. .6) = $4,000] [$10,000 x (1- © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 32
    • Self-Charged Rental Income Under the proposed regulations, in some circumstances, rental income from a taxpayer’s property when the taxpayer rents the property for use in an activity in which the taxpayer materially participates was subject to NIIT. However, under the final regulations, if rental income is treated as nonpassive by reason of § 1.469–2(f)(6) (which recharacterizes what otherwise would be passive rental income from a taxpayer’s property as nonpassive when the taxpayer rents the property for use in an activity in which the taxpayer materially participates) the gross rental income is deemed to be derived in the ordinary course of a trade or business and therefore not subject to the NIIT. "Net Investment Income Tax; Final and Proposed Rules," 78 Fed. Reg. 72394 (Dec. 2, 2013). © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 33
    • Self-Charged Rental Income Scenario. Beth’s pediatric practice rents a building from her for $50,000 a year. Beth is single, with a total MAGI of $200,000 including the rental income, and has no other investment activities. Solution. Beth will owe no NIIT. © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 34
    • Grouping Elections General Information about Grouping: • Congress created IRC § 469 to close abusive tax shelters. It restricts use of passive losses to offset other income. • IRC § 469 allows taxpayers to group separate activities together and treat them as a single activity. • It is difficult to regroup activities unless the original grouping was inappropriate or there was a considerable change in the facts and circumstances. The final § 1411 regulations allow a individual taxpayer to regroup his or her activities once. This regrouping may occur under § 1.469-11(b)(3)(iv) during the first taxable year after 12/31/13 in which a taxpayer (1) meets the applicable income threshold & (2) has net investment income. "Net Investment Income Tax; Final and Proposed Rules," 78 Fed. Reg. 72394,72397 (Dec. 2, 2013). © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 35
    • Grouping Elections Example. A, an unmarried individual, owns an interest in two apartment buildings, X and Y. A determines he will be eligible to regroup his activities in 2014 because he will have NII and his MAGI exceeds the threshold. A manages X, recording more than 500 hours in 2014. However, a management company operates Y, and he only records 50 hours towards Y in 2014. Because A participates more than 500 hours per year managing X, he is treated as materially participating in X. However, because of the properly made grouping election, A is also treated as materially participating in Y as well. If not for the grouping election, A would not materially participate in Y. Therefore, neither X nor Y are considered passive activities and © 2013 Prepared by Keebler & Associates, LLP the NIIT will apply to neither. All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 36
    • Application of the NIIT to Trusts and Estates American Institute of CPAs® Personal Financial Planning Section 37
    • 3.8% Net Investment Income Tax Overview—Trusts & Estates Example 1 The Bonnie Smith Trust • $51,000 investment income • Has made no distributions 3.8% NIIT would apply to $39,050 Excess of MAGI $51,000 Threshold -$11,950 =$39,350 © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 38
    • 3.8% Net Investment Income Tax Overview—Trusts & Estates Example 2 The Anita Jones Trust • $100,000 investment income • Has made distribution of 100% 3.8% NIIT would NOT apply Nothing taxable to the trust, but potentially to the beneficiaries © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 39
    • Special Rules for CRTs Although the trust itself is not subject to the NIIT, annuity and unitrust distributions may be net investment income to the non-charitable recipient beneficiary. One of Two Methods may be used • Simplified Method – Reg. § 1.1411-3(c)(2)(i) of the 2012 Proposed Regulations: Distributions from a CRT to a beneficiary for a taxable year consist of NII in an amount equal to the lesser of the total amount of the distributions for that year, or the current and accumulated NII of the CRT • Section 664 Method – Reg. §1.1411-3(d)(2): Categorize and distribute NII based on the existing section 664 category and class system • Reg. §1.1411-3(d)(3): Reserved for a rule allowing the CRT to elect between the two methods © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 40
    • Special Rules for S Corp Trusts QSSTs and ESBTs Qualified Subchapter S Trusts • Follows current subchapter S provisions • Application of § 1411(c)(4) is made at the trust level Electing Small Business Trusts • Reg. §1.1411-3(c)(1) provides special computational rules for ESBTs. • The S portion and non-S portion of an ESBT are treated as separate trusts for purposes of the computation of undistributed NII, but are treated as a single trust for purposes of determining the amount subject to tax under section 1411. • If a grantor or another person is treated as the owner of a portion of the ESBT, the items of income and deduction attributable to the grantor portion are included in the grantor’s calculation of NII and are not included in the ESBT’s computation of tax. • This rule applies a single section 1(e) threshold so as to not inequitably benefit ESBTs over other taxable trusts. • Three-step calculation See Reg. Section 1.1411-3(c)(1)-(2) & New 2013 Prop. Regs. American Institute of CPAs® © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved Personal Financial Planning and Tax Sections 41
    • Appendix: Planning Around the ‘NIIT’ American Institute of CPAs® Personal Financial Planning Section 42
    • Strategies Provided for in the Regulations Four ways for an item of income to be nonpassive (thus, not subject to NIIT) • • • • Grouping Elections Material participation (i.e., 500 hour test) Activity recharacterization Income recharacterization CRT Elections © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 43
    • Other Strategies for Reducing ‘Net Investment Income’ Municipal bonds Tax-deferred annuities Life insurance Rental real estate Oil & gas investments Choice of accounting year for estate/trust Timing of estate/trust distributions © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 44
    • Other Strategies for Reducing MAGI Roth IRA conversions Charitable remainder trusts (CRTs) Non-grantor charitable lead trusts (CLTs) Installment sales © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 45
    • Strategies for Reducing MAGI Charitable Remainder Trust A Charitable Remainder Trust (CRT) is a split interest trust consisting of an income interest and a remainder interest • During the term of the trust, the income interest is usually paid out to the donor (or some other named beneficiary) • At the end of the trust term, the remainder (whatever is left in the trust) is paid to the charity or charities that have been designated in the trust document PURPOSE OF STRATEGY (as it relates to the 3.8% NIIT) To harbor “net investment income” in a tax-exempt environment while at the same time leveling income over a longer period of time to keep MAGI below the “threshold amount” © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 46
    • Strategies for Reducing MAGI Charitable Remainder Trust Donor (Income Beneficiary) Donor receives an immediate income tax deduction for present value of the remainder interest (must be at least 10% of the value of the assets originally contributed) Transfer of highly appreciated assets CRT Annual (or more frequent) payments for life (or a term of years) At the donor’s death (or at the end of the trust term), the charity receives the residual assets held in the trust Public Charity (Remainder Beneficiary) © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 47
    • Strategies for Reducing MAGI Charitable Remainder Trust Two Main Types of CRTs • Charitable Remainder Annuity Trust (CRAT)—the beneficiaries receive a stated amount of the initial trust assets each year - The amount received is established at the beginning of the trust and will not change during the term of the trust regardless of investment performance - Unless inadequate investment performance causes the trust to run out of assets © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 48
    • Strategies for Reducing MAGI Installment Sale An installment sale is a type of sale in which the seller sells an asset to another person in exchange for a promissory note paid over a period of time • If executed correctly, the taxable gain recognized by the seller will be deferred until payments are made on the principal of the note PURPOSE OF STRATEGY (as it relates to the 3.8% NIIT) To level “net investment income” over a longer period of time so as to keep MAGI below the “threshold amount” © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 49
    • Strategies for Reducing MAGI Installment Sale Sale of highly appreciated asset Seller Promissory note paid over a period of years Buyer Taxable gain is deferred until payments on principal are made © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 50
    • Appendix: NIIT Examples American Institute of CPAs® Personal Financial Planning Section 51
    • 3.8% Net Investment Income Tax Example Example 1 John • Single Taxpayer • $100,000 of Salary 3.8% NIIT Would NOT apply • $50,000 net investment income MAGI is less than threshold MAGI is $150,000 © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 52
    • 3.8% Net Investment Income Tax Example Example 2 Linda • Single taxpayer • $0 employment income • $225,000 net investment income 3.8% NIIT would apply to $25,000 Excess of MAGI Threshold $225,000 -$200,000 =$25,000 © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 53
    • 3.8% Net Investment Income Tax Example Example 3 Tina & Terry • Married, filing jointly 3.8% NIIT would NOT apply • $300,000 combined salary • $0 net investment income Wages Exempt from NII © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 54
    • 3.8% Net Investment Income Tax Example Example 4 Peter & Paula • Married, filing jointly • $400,000 salary income • $50,000 passive rental income 3.8% NIIT would apply to $50,000 Tax = $1,900 © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 55
    • 3.8% Net Investment Income Tax Example Example 5 Sarah & Scott • Married, filing jointly • $200,000 salary income • $150,000 “passive” real estate investment Excess of MAGI Threshold 3.8% NIIT would apply to $100,000 Tax = $3,800 $350,000 -$250,000 =$100,000 © 2013 Prepared by Keebler & Associates, LLP All Rights Reserved American Institute of CPAs® Personal Financial Planning and Tax Sections 56
    • Circular 230 Disclosure 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 57
    • 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 American Institute of CPAs® Personal Financial Planning and Tax Sections 58