Tax

Here is some important information regarding the net investment income tax (NIIT), which may be relevant to your financial situation.

NIIT Overview

The NIIT is a 3.8 percent tax that could apply if your modified adjusted gross income (MAGI) exceeds $200,000 (single filers), $250,000 (married, filing jointly), or $125,000 (married, filing separately). It targets the lesser of your net investment income or the amount by which your MAGI exceeds the thresholds.

What Qualifies as Net Investment Income?

Net investment income includes income from investments (such as interest, dividends, and annuities), net rental income, and income from businesses in which you don’t materially participate. It does not include wages, self-employment income, tax-exempt income, and distributions from qualified retirement plans.

Reducing or Avoiding the NIIT

To mitigate the NIIT, it’s crucial to understand what’s triggering it—your net investment income or your MAGI. Here are some strategies:

1. Invest in municipal bonds. Pick bonds that are exempt from the NIIT and from federal and state taxes.
2. Donate appreciated assets. The correct asset donation avoids the NIIT and provides a tax deduction.
3. Avoid selling appreciated stock. Buy growth stocks that don’t pay dividends, and hold them.
4. Utilize Section 1031. It avoids MAGI and net investment income, and defers taxes.
5. Invest in life insurance and annuities. This typically defers tax until withdrawal.
6. Harvest investment losses. This can offset gains and reduce taxable income.
7. Invest in rental real estate. Structured correctly, this can minimize taxable income.

Other Strategies

• Active participation in business. It avoids classifying income as net investment income.
• Short-term rentals and real estate professional status. These also avoid classifying income as net investment income.
• Alternative marital status. Though this option may seem extreme, two single taxpayers have a higher MAGI threshold than a married couple.
• Retirement plan investments. These can reduce MAGI.
• IRA conversions. Converting traditional IRAs to Roth IRAs may trigger the NIIT but can have long-term tax benefits.
• Installment sales. They can level out MAGI over time.

The NIIT can be complex, but strategic planning can significantly reduce its impact. If you want to discuss the NIIT, please don’t hesitate to call me on my direct line at 408-778-9651.

• By Leon Clinton
• December 19, 2023

For existing businesses, the Corporate Transparency Act (CTA) goes into effect on January 1, 2024, and imposes a brand-new federal filing requirement on most corporations,

limited liability companies, and limited partnerships and on certain other business entities.

No later than December 31, 2024, all non-exempt business entities must file a beneficial owner information report (BOI report) with the Financial Crimes Enforcement Network (FinCEN)—the Treasury Department’s financial intelligence unit.

These BOI reports must disclose the identities and provide contact information for all of the entity’s “beneficial owners”: the humans who either (1) control 25 percent of the ownership interests in the entity or (2) exercise substantial control over the entity.

Your BOI report must contain all the following information for each beneficial owner:[1]

• Full legal name
• Date of birth
• Complete current residential street address
• A unique identifying number from either a current U.S. passport, state or local ID document, or driver’s license or, if the individual has none of those, a foreign passport
• An image of the document from which the unique identifying number was obtained

FinCEN will create a new database called BOSS (Beneficial Ownership Secure System) for the BOI data and will deploy the BOSS to help law enforcement agencies prevent the use of anonymous shell companies for money laundering, tax evasion, terrorism, and other illegal purposes. It will not make the BOI reports publicly available.

The CTA applies only to business entities such as corporations and LLCs that are formed by filing a document with a state secretary of state or similar official. It also applies to foreign business entities that register to do business in the United States.

Some businesses are exempt from the CTA, including

• larger businesses with 20 or more employees and $5 million in receipts, and
• businesses already heavily regulated by the government, such as publicly traded corporations, banks, insurance companies, non-profits, and others.

The CTA does not apply to sole proprietors or general partnerships in most states. But it does apply to single-member LLCs, even though the tax code disregards such entities and taxes them on Schedule C, E, or F of Form 1040.

The initial BOI report filing does not expire, and you don’t need to renew it. But you have an ongoing duty to keep the BOI report up to date by reporting any changes to FinCEN within 30 days of occurrence.

Failure to comply can result in hefty monetary penalties and up to two years in prison.

If you want to discuss the CTA, please call me on my direct line at 408-778-9651.

[1] 31 CFR Section 1010.380(b)(1)(ii).

• By Leon Clinton
• December 15, 2023

The SECURE 2.0 Act, enacted in late 2022, is changing your retirement plan’s ability to allow catch-up contributions.

Enhanced Catch-Up Limits (2025 Onward)

One of the major updates introduced by SECURE 2.0 is the enhancement of catch-up contribution limits for individuals aged 60 to 63. Starting in 2025, the maximum catch-up contribution for employer-sponsored plans—401(k), 403(b), and 457(b)—increases to the greater of $10,000 (adjusted for inflation) or 150 percent of the 2024 regular catch-up contribution limit.

For SIMPLE IRA participants, this limit is the greater of $5,000 or 150 percent of the 2025 regular catch-up limit. This change offers a significant opportunity to bolster your retirement savings.

To be clear, these super catch-up contributions are allowed only if you reach age 60, 61, 62, or 63 during the year in question. If you are not within that age window for the year in question but are age 50 or older, the “regular” catch-up contribution maximums apply. Those maximums are $7,500 and $3,500 (SIMPLE IRA) for 2023, adjusted for inflation in future years.

Controversial Change for High-Income Participants Delayed

Another change initially set for 2024, which faced considerable backlash, has been postponed to 2026. This pertains to high-income participants (with prior-year FICA wages over $145,000, adjusted for inflation) in employer-sponsored plans. Such individuals will make catch-up contributions only to a designated Roth account.

While these contributions don’t reduce taxable wages, they do offer tax-free growth and withdrawals under qualifying conditions.

Why This Matters

The Roth account change, though now delayed, will eventually impact how high-earning individuals can make catch-up contributions. If your plan doesn’t offer a Roth option, amendments to enable these contributions might be required.

Immediate Steps

The status quo remains for 2024 and 2025, allowing standard catch-up contributions for those age 50 or over. It’s advisable to start planning for the SECURE 2.0 changes, especially if you manage a 401(k) plan for employees. Understanding these shifts and preparing in advance will help ensure smooth compliance and optimal retirement planning.

If you want to discuss these SECURE 2.0 changes, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• December 11, 2023