Will Net Investment Income Tax Be “Repealed and Replaced?”

Real Estate Investment Attorneys Serving the Sugarland, Texas Area

As most high-income individuals can testify, the Affordable Care Act, a/k/a “Obamacare,” contained provisions that were not directly associated with securing healthcare insurance for the uninsured. One of them, the Net Investment Income Tax (NIIT), essentially extended the Medicare portion of the federal most payroll tax to investment earnings. For the first time, married couples with more than $250,000 of adjusted gross income (AGI), and individual filers with more than $200,000 of AGI, were saddled with a 3.8 percent surcharge on income derived from investments.

There are some signs on the horizon that Congress may be maneuvering to jettison the NIIT. Texas taxpayers should review their investment situations to determine what course they might need to take.

Investment Income: What Is It?

Generally speaking, investment income is that which is “earned” passively (i.e., from a source that did not require the taxpayer’s material participation). Self-employed income, therefore, is not subject to the NIIT. Examples of investment income include:

  • Rental income
  • Royalty income
  • Annuity distributions
  • Dividends from stocks, bonds, or mutual funds (some types of municipal bonds are exempt)
  • Realized gains from selling any of these financial instruments
  • Interest received on loans
  • Capital gains from the sale of investment property (in most cases, this does not include gains on the sale of a primary residence)
  • Profits realized on the sale of a business, if the taxpayer was an inactive or passive investor

Republican ACA Repeal Would Eliminate Net Investment Income Tax

The Obamacare “repeal and replace” bill introduced mid-March into the House of Representatives would eliminate the NIIT. While the legislation appears stalled for now, there is movement afoot to get rid of the 0.9 percent surcharge on wages above $250,000, even if a larger health care bill is not forthcoming.

Repeal Would Benefit Those With Real Estate Investments

Tax and legal experts note that repeal of the NIIT would be particularly beneficial to real estate investors, including those who invest in real estate funds. Since most such investors do not materially participate (that’s an IRS term, of course), the income thrown off from those enterprises is currently subject to the 3.8 percent federal tax.

Full Effect of NIIT Repeal Won’t Be Felt Until 2018

Under the current version of the bill, the full effects of ACA repeal (and replace) won’t be felt until 2018, so investment income earned during 2017 may still be subject to the NIIT. Nevertheless, repeal of the NIIT could offer high net worth individuals some tax planning opportunities. Some tax and legal experts note, for example, that after a repeal of the NIIT, it might be advantageous to shift more investments to those that generate current income. Repeal might also affect the timing of investment sales since, under the current version of the proposed law, an investor could avoid the NIIT by waiting until 2018 to sell.

Review of Tax Planning Documents, Including Trusts, Might Be in Order

As Congress contemplates whether it will repeal (and replace) Obamacare, and as it considers abolishing the NIIT, it might be time to review your current tax planning documents – particularly any trusts that you have established in recent years. If you have not yet completed a thorough review of your estate planning situation, that would also be advisable at this point.

Tax Planning is Now More Important Than Ever

Texas BarToday Top Ten BadgeAs taxpayers/investors move through 2017, careful tax planning is more important than ever.  While gridlock has ruled in Washington, D.C. for some years now, there is a general consensus that some tax reform legislation may actually be passed and signed into law before the end of the year. Align yourself with a group of proven experts in the field of estate planning, wealth management, and tax-oriented planning. The investment attorneys at Romano & Sumner have more than 20 years of combined experience providing expert legal assistance to clients in all types of complex wealth management, tax planning and asset preservation issues. At Romano & Sumner, we pride ourselves not only upon our professionalism, but also upon our client service. As real estate investment lawyers we understand that each situation is unique. We return phone calls within one business day. We keep clients informed. We complete the work within the allotted time frame. Call us at 281-242-0995 or complete our online contact form.

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    Romano & Sumner, PLLC

    Romano & Sumner, PLLC