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Distributor's Link Magazine Fall 2020 / Vol 43 No 4


56 THE DISTRIBUTOR’S LINK Roman Basi Roman Basi is the President of The Center for Financial, Legal & Tax Planning, Inc. Roman graduated from Milliken University obtaining a Bachelor’s of Science Degree with a minor in Psychology. He earned an MBA from Southern Illinois University with an emphasis in Accounting and recevied his JD degree from Southern Illinois University. Roman is a licensed CPA as well as being a licensed attorney in Illinois, Missouri and Florida and is in high demand for his expertise in financial, legal and tax matters. His areas of expertise include mergers and acquisitions, contracts, real estate law, tax and estate planning. WHAT’S THE NET INVESTMENT INCOME TAX AND HOW DOES IT APPLY TO ME? The Net Investment Income Tax (NIIT) effects most taxpayers; however, it has a more substantial impact on business owners and investors. Under the Internal Revenue Code (IRC) Section 1411, the NIIT was created and placed into effect on January 1, 2013. The NIIT is applied at a rate of 3.8% to certain net investment income of an individual and for trusts and estates that have income above the statutory thresholds. These thresholds, unlike most, are NOT annually adjusted for inflation. Having been put into effect in 2013, the NIIT affects income tax returns of individuals, estates and trusts, beginning with their first tax year on (or after) Jan. 1, 2013. The statutory thresholds are set at the following amounts based on the filing status of the taxpayer(s). You may be wondering, “What is included in ‘Investment Income’?” In general, investment income includes, but is not limited to: ¤ Interest ¤ Dividends ¤ Capital gains - Gains from the sale of stocks, bonds and mutual funds. - Capital gain distributions from mutual funds. - Gain from the sale of investment real estate (including gain from the sale of a second home that is not a primary residence). - Gains from the sale of interests in partnerships and S corporations (to the extent CONTRIBUTOR ARTICLE the partner or shareholder was a passive owner). ¤ Rental and royalty income ¤ Non-qualified annuities ¤ Income from businesses involved in trading of financial instruments or commodities and businesses that are passive activities to the taxpayer (within the meaning of US Code section 469 1 ). It is also important to understand which types of income are not considered or included in Net Investment Income. This knowledge can help taxpayers to avoid or reduce their NIIT liability. Below is a non-exhaustive list of common types of income that will not be considered Net Investment Income: ¤ Wages ¤ Unemployment compensation ¤ Operating income from a nonpassive business ¤ Social Security Benefits ¤ Alimony ¤ Tax-exempt interest ¤ Self-employment income ¤ Alaska Permanent Fund Dividends (see Rev. Rul. 90-56, 1990-2 CB 102) and ¤ Distributions from certain Qualified Plans (sections 401(a), 403(a), 403(b), 408, 408A or 457(b)) Now, let’s discuss some taxpayers and estate planning structures that are NOT subject to the NIIT. The tools of financial planning may be used to avoid the extra 3.8% tax on investment income. The IRS has listed on their website the following exemptions from NIIT: ¤ Trusts that are exempt from income taxes ¤ Grantor trusts ¤ Trusts not technically classified as “trusts” for federal income tax purposes ¤ Perpetual care trusts ¤ Electing Alaska Native Settlement Trusts CONTINUED ON PAGE 142


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