November 26, 2013

Expenses that Reduce Net Investment Income

Anders has been busy blogging about the new Net Investment Income Tax and what it means to taxpayers as they begin their 2013 year-end planning.  Taxpayers with adjusted gross income exceeding $250,000 ($200,000 for single filers) will incur a 3.8% tax on some or all of their net investment income (NII). We have previously explained what types of income are included in the net investment income calculation; now we’re going to cover expenses that reduce net investment income. The proposed regulations allow your net investment income to be reduced by certain properly allocable deductions; here are a few examples:

  1. Investment interest expense – including carry forward amounts
  2. Investment advisory and brokerage fees
  3. State and local income taxes

Item three is of particular interest because it presents an interesting twist on traditional advice.  Net investment income is reduced by an allocable portion of a taxpayer’s Schedule A state and local tax deduction.  This allocation can be determined using “any reasonable method”, but the IRS has provided a safe harbor allocation based on the ratio of investment income to gross income.

When investment income is a large percentage of gross income, the reduction to NII could substantially reduce one’s exposure to the 3.8% tax.  Historically, taxpayers subject to the alternative minimum tax would not pre-pay state tax, as the deduction is disallowed for AMT purposes.  Therefore, taxpayers with large NII might rethink this conventional advice if they project to be subject to AMT on an annual basis.

It is important to note that reductions to NII are phased-out based on adjusted gross income in a manner consistent with the traditional Schedule A phase-outs.

As you can see, in order to plan for year end, it is important to understand not only what income, but also what deductions, are comprehended to arrive at net investment income. The stakes are certainly high, and thankfully you can always call an Anders advisor to discuss a tax strategy that fits your needs.

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November 20, 2013

Anders Opens New Office at 800 Market Street

Anders’ Downtown and Brentwood offices combined into approximately 45,000 square feet on the Fifth Floor of the Atrium at Bank of America Plaza Downtown St. Louis.  Our new office opened December 30. The new address is:

800 Market Street
Suite 500
St. Louis, MO 63101

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November 12, 2013

How does the 3.8% Net Investment Income Tax Apply to Real Estate Professionals?

As you’ve probably noticed, a CPA’s answer to almost every question is, “It depends”.  So, when you ask your accountant how you’ll be impacted by the new 3.8% net investment income tax, you already know the answer, right?  But what does it depend upon?  There are actually quite a few variables.

Generally speaking, if your 2013 adjusted gross income (AGI) exceeds $250,000 ($200,000 for single filers) you will incur an additional 3.8% tax on your net investment income (NII).  NII includes portfolio income (interest, dividends, and capital gains), annuity income, income from passive investments, and rental income.

There are, however, some possible exceptions to the new law.  The following items are not subject to the new 3.8% Surtax:

  1. S corporation distributions to owners who materially participate
  2. Rents received by ‘real estate professionals’ who materially participate in the underlying activity
  3. Grouping of rental activities with businesses in which owners materially participate
  4. Recharacterized rents received from businesses in which the owner materially participates
  5. Non-portfolio capital gains or losses attributable to property held by an entity in which the owner materially participates.

Some aspects of these exceptions require additional explanation and, to some degree, are subject to interpretation because the proposed regulations outlining the new 3.8% tax are not yet final.

One somewhat controversial aspect of the 3.8% Surtax is how it will apply to self-rented property.  It’s a common tax planning strategy for business owners who own their own building to hold it separately from their operating entity and to pay themselves rent.  The IRS requires income from self-rented property to be categorized as non-passive income regardless of the material participation rules.  The question is whether or not this ‘non-passive’ income is subject to the 3.8% Surtax.  The answer is, of course, it depends…

While tax law isn’t always clear, it is clear that your Anders advisors are adept at interpreting tax law and we’re always available to discuss how to minimize your tax liability; please contact us to discuss these concepts in more detail.

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