Certain veterans who received disability severance payments after January 17, 1991, and included that payment as income that they should file Form 1040X, Amended U.S. Individual Income Tax Return, to claim a credit or refund of the overpayment attributable to the disability severance payment. The refund is the result of the Combat-Injured Veterans Tax Fairness Act passed in 2016.

Most veterans who received a one-time lump-sum disability severance payment when they separated from their military service will receive a letter from the Department of Defense with information explaining how to claim tax refunds they are entitled to; the letters include an explanation of a simplified method for making the claim.

The amount of time for claiming these tax refunds is limited; however, the law grants veterans an alternative timeframe of one year from the date of the letter from DoD. Veterans making these claims have the normal limitations period for claiming a refund or one year from the date of their letter from the DoD, whichever expires later. As taxpayers can usually only claim tax refunds within 3 years from the due date of the return, this alternative time frame is especially important since some of the claims may be for refunds of taxes paid as far back as 1991.

Veterans can submit a claim based on the actual amount of their disability severance payment by completing Form 1040X and carefully following the instructions. There is also a simplified method where veterans can instead choose to claim a standard refund amount based on the calendar year (i.e., an individual’s tax year) in which they received the severance payment. Claiming the standard refund amount is the easiest way for veterans to claim a refund because they do not need to access the original tax return from the year of their lump-sum disability severance payment.

Veterans eligible for a refund who did not receive a letter from DoD may still file Form 1040X to claim a refund but must include additional documentation to verify the disability severance payment. Veterans who did not receive the DoD letter and who do not have the required documentation showing the exact amount of and reason for their disability severance payment will need to obtain the necessary proof by contacting the Defense Finance and Accounting Services (DFAS).

Please contact the office if you need additional information or assistance filing Form 1040X.

• By Leon Clinton
• August 21, 2018

While the Net Investment Income Tax (NIIT) tends to affect wealthier individuals most often, in certain circumstances, it can also affect moderate-income taxpayers whose income increases significantly in a given tax year. Here’s what you need to know.

What is the Net Investment Income Tax?

The Net Investment Income Tax (NIIT) is a 3.8 percent tax on certain net investment income of individuals, estates, and trusts with income above statutory threshold amounts referred to as modified adjusted gross income or MAGI.

What is Included in Net Investment Income?

In general, investment income includes, but is not limited to interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities, and passive business activities such as rental income or income derived from royalties.

What is Not Included in Net Investment Income?

Wages, unemployment compensation; operating income from a non-passive business, Social Security Benefits, alimony, tax-exempt interest, self-employment income, Alaska Permanent Fund Dividends, and distributions from certain Qualified Plans are not included in net investment income.

Individuals

Individuals with MAGI of $250,000 (married filing jointly) or $200,000 for single filers are taxed at a flat rate of 3.8 percent on investment income such as dividends, taxable interest, rents, royalties, certain income from trading commodities, taxable income from investment annuities, REITs and master limited partnerships, and long and short-term capital gains.

The NIIT is a flat rate tax that is paid in addition to other taxes owed, and threshold amounts are not indexed for inflation.

Non-resident aliens are not subject to the NIIT; however, if a non-resident alien is married to a US citizen and is planning to file as a resident alien for the purposes of filing married jointly, there are special rules. Please call if you have any questions.

Investment income is generally not subject to withholding, so NIIT is going to affect your tax liability for the 2018 tax year. In addition, even lower income taxpayers not meeting the threshold amounts may be subject to NIIT if they receive a windfall such as a one-time sale of assets that bumps their MAGI up high enough to be subject to the NIIT.

Strategies to Minimize NIIT

Tax planning is crucial–for this year as well as next. If you are anticipating a windfall this tax year or next, there are a number of strategies that you could use to minimize your MAGI and reduce or possibly eliminate tax liability when you file your tax return. These include but are not limited to:

• Rental Real Estate (depreciation deductions)
• Installment sales (including figuring out the best timing for sale)
• Roth conversions
• Charitable donations
• Tax-deferred annuities
• Municipal bonds

Sale of a Home

The Net Investment Income Tax does not apply to any amount of gain that is excluded from gross income for regular income tax purposes ($250,000 for single filers and $500,000 for a married couple) on the sale of a principal residence from gross income for regular income tax purposes. In other words, only the taxable part of any gain on the sale of a home has the potential to be subject to NIIT, providing the taxpayer is over the MAGI threshold amount.

Estates and Trusts Affected

Estates and Trusts are subject to NIIT if they have undistributed net investment income and also have adjusted gross income over the dollar amount at which the highest tax bracket for an estate or trust begins for such taxable year. In 2018, this threshold amount is $12,500.

Special rules apply for certain unique types of trusts such a Charitable Remainder Trusts and Electing Small Business Trusts, and some trusts, including “Grantor Trusts” and Real Estate Investment Trusts (REIT) are not subject to the NIIT.

Please note, however, that non-qualified dividends generated by investments in a REIT that are taxed at ordinary tax rates may be subject to the Net Investment Income Tax.

Questions? If you need guidance on the NIIT and estates and trusts, help is just a phone call away.

Reporting and Paying the Net Investment Income Tax

Individual taxpayers should report (and pay) the tax on Form 1040. Estates and Trusts report (and pay) the tax on Form 1041.

Individuals, estates, and trusts that expect to be pay estimated taxes in 2018 or thereafter should adjust their income tax withholding or estimated payments to account for the tax increase in order to avoid underpayment penalties. For employed individuals, the NIIT is not withheld from wages; however, you may request that additional income tax is withheld.

Wondering how the Net Investment Income Tax affects you? Give the office a call today and find out.

• By Leon Clinton
• August 12, 2018

August 10

Employees Who Work for Tips – If you received $20 or more in tips during July, report them to your employer. You can use Form 4070.

Employers – Social Security, Medicare, and withheld income tax. File Form 941 for the second quarter of 2018. This due date applies only if you deposited the tax for the quarter in full and on time.

August 15

Employers – Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in July.

Employers – Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in July.

• By Leon Clinton
• August 6, 2018