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

You know how important it is to obtain receipts for the expenses you and your employees incur. You need to record them, analyze their impact on your cash flow, and claim some of them on your income taxes.

Your customers, too, expect to receive forms documenting purchases they’ve made from you. When they pay you immediately for goods or services, you’ll give them a sales receipt, rather than invoicing them for future remittance. Not only will your customers have a record of the transaction–you will, too.

QuickBooks supports the creation and tracking of sales receipts. It manages the mechanics of this important task incredibly well and eliminates the need to enter receipt data twice, once on a paper copy for your customer and again in your accounting system. This QuickBooks feature not only minimizes errors but saves time and lessens the possibility of disputes down the road.

A Simple Form

Here’s an example of a situation that illustrates the importance of really learning about and understanding QuickBooks before you start entering live data. Say you got a check from a customer on the spot for a house painting job you completed. When you look at QuickBooks’ home page, which icon do you click?

You might be tempted to click Receive Payments since that’s exactly what you are doing. But that screen is reserved for revenue that comes in to satisfy outstanding invoices and unpaid items on billing statements. Instead, you would click Create Sales Receipts to open the Enter Sales Receipts window. Here’s a partial view of what you would see:

Figure 1: When a customer pays you immediately for goods or services, you need to open and complete the Enter Sales Receipts window. 

If you’ve already entered your customer and item/service records in QuickBooks, you can record your sale very quickly here. Even if you haven’t, or if you need to create a new record on the fly, you can selectwhen you open the drop-down option lists for the Customer:Job and Item fields.

Warning: Do you need to track inventory levels for products you sell? Have you created accurate records for these items? There is information that QuickBooks needs to help ensure that you don’t run out of stock or keep too much on hand. Let a QuickBooks professional walk you through the software’s inventory-management tools so you can take advantage of all the benefits it offers.

Once you’ve selected the appropriate customer, Class (if you use this feature), and Template (Here again, do you understand that you can either use the default sales receipt form provided by QuickBooks or customize it? We can help here), make sure that the Date and Sale No. are correct.

Next, click on the icon representing the transaction’s payment method, choosing from Cash, Check, Credit Card, or eCheck. Click the Morebutton if your method isn’t listed there. Here, you can add new options by selecting Add New Payment Method. A small window will open allowing this. If you want to modify this list further by editing and deleting the default methods for example, simply clear and close the current sales receipt, and then open the Lists menu, and select Customer & Vendor Profile Lists | Payment Method List. This window will open:

Figure 2: Click the down arrow in the Payment Method field near the bottom of this window to see your modification options. 

Once you have chosen the desired Payment Method (and entered a check number if necessary), complete the rest of the sales receipt much like you would an invoice, by selecting the correct products or services, the quantity you are selling, and the transaction’s tax status. QuickBooks will fill in the rest if you ‘ve created complete item records.

When you are done save the sales receipt. Information about the transaction will be available in standard places like the Customer Information screens and various reports.

Whether your revenue is generated instantly (i.e., documented by a sales receipt) or as longer-term payment on an invoice, your company’s income is just one element of the cash flow equation. Are you able to create and interpret the reports that can help you understand these complex calculations, like Cash Flow Forecast and Profit & Loss? You probably run some of QuickBooks’ more basic sales reports regularly, but consider bringing in a QuickBooks expert to do the deep analysis needed to make better business decisions.

• By Leon Clinton
• July 29, 2018