Document created on 12/6/12.

BEGINNING JANUARY 1, 2013, 1411 OF THE INTERNAL REVENUE CODE (IRC) WILL IMPOSE A TAX OF 3.8% ON THE NET INVESTMENT INCOME OF CERTAIN INDIVIDUALS, ESTATES, AND TRUSTS. THE FOLLOWING WORKSHEETS EXAMINE THE EFFECT OF THE NEW LAW ON INDIVIDUAL TAXPAYERS: WHO IS SUBJECT TO THE NET INVESTMENT INCOME TAX (NIIT)?
- Citizens and residents of the United States i, ii - Bona Fide Residents of United States Territories iii - Bankruptcy Estates iv - Certain Trusts and Estates (See 1411(a)(2)).

HOW IS THE NET INVESTMENT INCOME TAX APPLIED?

In the case of an individual, the NIIT is applied to the lesser of v 1. Net investment income (NII), or 2. The excess of modified adjusted gross income (MAGI) over the applicable threshold amount.

WHAT IS NET INVESTMENT INCOME?

Prop. Reg. 1.1411-4 defines NII as: Interest, dividends, capital gains, rent and royalty income, and non-qualified annuities. vi Other income and gains from passive activities. vii Other income and gains from businesses involved in the trading of financial instruments and commodities. viii Gains from the sale of interests in partnerships and S corporations, subject to exceptions. ix Please see the accompanying pages for the determination of the types of income included in a taxpayers net investment income.

WHAT IS MODIFIED ADJUSTED GROSS INCOME?

Under 1411(d), modified adjusted gross income is a taxpayers adjusted gross income increased by the excess (if any) of foreign earned income normally excludable under 911(a) less amounts deducted in computing adjusted gross income and deductions attributable to foreign earned income. x

WHAT ARE THE THRESHOLD AMOUNTS?

xi

ON WHAT FORM IS THE NET INVESTMENT INCOME TAX REPORTED?

The NIIT will be reported on the Taxpayers Form 1040. The IRS does not require a separate form to be filed in instances where individuals are subject to the tax.

Married filing jointly or surviving spouse: $250,000 Married filing separately: $125,000 All other taxpayers: $200,000

IS THE NET INVESTMENT INCOME TAX SUBJECT TO ESTIMATED TAX PROVISIONS?

Yes, the NIIT is subject to the estimated tax provisions. Individuals who anticipate exceeding the applicable thresholds should adjust withholdings or increase estimated tax payments to avoid underpayment penalties.
i ii Prop. Reg. 1.1411-2(a)(1). Nonresident aliens are not subject to the NIIT. A U.S. resident or citizen who is married to a nonresident alien spouse must compute net investment income and MAGI separately, and must use a $125,000 threshold, unless the taxpayers have made or make an election to file jointly pursuant to 6013(g). Consult Prop. Reg. 1.1411-2(a)(2)(i)(B)(2). iii Prop. Reg. 1.1411-2(a)(2)(iv). iv Prop. Reg. 1.1411-2(a)(iii). v Prop. Reg. 1.1411-2(b). vi Prop. Reg. 1.1411-4(a)(1)(i). vii Prop. Reg. 1.1411-4(a)(1)(ii). viii Id. ix Prop. Reg. 1.1411-4(a)(1)(iii). x Prop. Reg. 1.1411-2(c). If a taxpayer does not have foreign earned income, MAGI will equal the taxpayers adjusted gross income. xi Prop. Reg. 1.1411-2(d).

To speak to the authors of this document, please contact Tony Nitti at 970-429-8074 or Kevin Mohr at 732-828-1614

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INTEREST, DIVIDENDS, ANNUITIES, ROYALTIES

ii

RENTAL INCOME

Was the income earned in a trade or business under the meaning of Section 162? iii

Was the income earned in an activity that meets an exception to rental activities under Treas. Reg. 1.469-1T?

No

Yes
Was the income earned in the ordinary course of the trade of business? (i.e. not portfolio income) iv

No

Yes

No

Yes
Is the trade or business the trading of financial instruments or commodities? v

Is the taxpayer a real estate professional under the meaning of Section 469(c)(7)? ii

No

Yes

Does the rental activity rise to the level of a trade or business under the meaning of Section 162? iii

Yes

No
Did the taxpayer materially participate in the trade or business under the meaning of Section 469? (i.e. the activity was non-passive to the taxpayer) vi

No

Yes

Did the taxpayer materially participate in the activity under the meaning of Section 469? iv

No

Yes No
Income is excluded from net investment income viii

Yes
Rental income is excluded from net investment income.

Income is net investment income vii (less properly allocable deductions)

Income is net investment income (less properly allocable deductions) v

i ii iii iv v vi vii viii

Prop. Reg 1.1411-4 (a)(1)(i) Includes substitute interest and dividend payments, see Prop. Reg 1.1411-4(a)(1)(i) Prop. Reg 1.1411-4(b), see Prop. Reg 1.1411-4(b)(3) Example 1 Id. Id., Prop. Reg 1.1411-5(a)(1) Id., Prop. Reg 1.1411-5(a)(2), see Prop. Reg 1.1411-4(b)(3) Example 2 See Prop. Reg 1.1411-4(f) See Prop. Reg 1.1411 - 4(b)(3) Example 3

i ii iii iv

Prop. Reg 1.1411-5(b)(2) Example 5 Prop. Reg 1.1411-4 (a)(1)(i) See the preamble to the proposed regulations page 50 Prop. Reg 1.1411-5(b)(2) Example 1 Consider the effect of any grouping elections made pursuant to Treas. Reg 1.469-4 See Prop. Reg 1.1411-5(b)(2) Example 2 v Prop. Reg 1.1411-4(f)

To speak to the authors of this document, please contact Tony Nitti at 970-429-8074 or Kevin Mohr at 732-828-1614

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GAIN FROM THE SALE OF ASSETS

Is the trade or business the trading of financial istruments or commodities? ii

Was the gain from the sale of S corporation stock or a partnership interest?

Yes

No

Yes

No

See next page Does the taxpayer materially participate in the activity under the meaning of Section 469? iii

Was the property held in a trade or business under the meaning of Section 162? ii

No

Yes
Was the trade of business the trading of financial instruments? iii

No

Yes Yes
Income is excluded from net investment income

No
Did the taxpayer materially participate in the activity under the meaning of Section 469? iv

No

Yes
Was the sold asset working capital? v

Income is net investment income (less properly allocable deductions)

Yes
Gain is net investment income. vi

No

Gain is not net investment income.

ii iii

Income other than interest, dividends, annuities, royalties, rents, or gains from the sale of property. Prop. Reg 1.1411-4 (c)(1). Income that is not earned in a trade or business (for example, hobby income under Section 183) is not included in net investment income unless the income is interest, dividends, annuities, royalities, rent, or gains from the disposition of property. See the preamble to the proposed regulations on page 48. Prop. Reg 1.1411-4(c)(2) Prop. Reg 1.1411-4(c)(1), See Prop. Prop. Reg 1.1411-5(b)(2) Example 5

i ii iii iv v vi

Prop. Reg 1.1411-4(d) Prop. Reg 1.1411-4(d)(3)(ii), See Prop. Reg 1.1411-4(d)(3)(ii)(c) Example 1 Id. Id. Id. Prop. Reg 1.1411-4(d)(2). Gain may be reduced by net losses, but not below zero.

To speak to the authors of this document, please contact Tony Nitti at 970-429-8074 or Kevin Mohr at 732-828-1614

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GAIN FROM THE SALE OF INTERESTS IN PARTNERSHIPS AND S CORPORATIONS

Was the S corporation or partnership engaged in one or more trades or businesses under the meaning of Section 162? i

GAIN FROM THE SALE OF A RESIDENCE

Did the residence meet the definition of the taxpayers principle residence under the meaning of Section 121?

No

Yes

No

Yes

Was at least one of the trades or businesses not the trading of financial instruments or commodities? ii Was any gain remaining after the application of the appropriate Section 121 exclusion?

No

Yes

Does the seller materially participate in the non-financial trade or business under the meaning of Section 469? iii

Yes

No

No

Yes

Gain is net investment income

vii

Seller may reduce any gain from the sale of the interest in the partnership or S corporation pursuant to Prop. Reg. 1.1411-7(e) iv

Gain is net investment income.

Gain is not included in net investment income. i

i ii iii iv

Prop. Reg 1.1411-7 (a)(1)(A) Id. Prop. Reg 1.1411-7 (a)(2)(i)(B) Prop. Reg 1.1411-7 (c), Prop. Reg 1.1411-7 (e), Examploes 1-8

Prop. Reg 1.1411-4(b) Example 4

To speak to the authors of this document, please contact Tony Nitti at 970-429-8074 or Kevin Mohr at 732-828-1614

This document is not intended as tax advice. Use at your own risk. Please consult with your tax advisor to determine how any item applies to your situation. To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication (including attachments) is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

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