Robert S. Keebler, CPA, MST, AEP: Applying the 3.

8% Net Investment Income Tax

Threshold Amounts Single Person $200,000 Married Couple $250,000 Trust or Estate $11,950
*The trust & estate threshold amount is indexed for inflation

Is MAGI above the threshold amount?

Yes

No

NIIT N/A

NIIT Worksheet Does MAGI or NII Control?`

MAGI Less: Threshold Amount
See Worksheet

MAGI: Adjusted gross income (i.e., Form 1040, Line 37) PLUS Net foreign earned income exclusion

1. The excess (if any) of

The Tax is imposed on the lesser of :
- Modified Adjusted Gross Income (MAGI) - Threshold Amount

Excess over threshold (1) NII (2) Lesser of (1) or (2) Rate NIIT

Net Investment Income (NII) Includes: Interest Dividends Annuity Distributions Rents Royalties Income derived from passive activities Net capital gain derived from the disposition of property

OR 2. Net Investment Income

X 3.8%

Strategies for Reducing MAGI Roth IRA Conversions Charitable Remainder Trusts (CRTs) Non-grantor Charitable Lead Trusts (CLTs) Installment Sales

Does MAGI or NII control?

See the Worksheet - If NII MAGI in excess of the threshold, reduce NII - If NII MAGI in excess of the threshold, reduce NII or MAGI

Strategies for Reducing NII Municipal bonds Tax-deferred annuities Life insurance Rental real estate Oil & gas investments Choice of accounting year for estate/trust Timing of estate/trust distributions

Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to any other party. For discussion purposes only. This work is intended to provide general information about the tax and other laws applicable to retirement benefits. The author, his firm or anyone forwarding or reproducing this work shall have neither liability nor responsibility to any person or entity with respect to any loss or damage caused, or alleged to be caused, directly or indirectly by the information contained in this work. This work does not represent tax, accounting, or legal advice. The individual taxpayer is advised to and should rely on their own advisors.

For more information please contact Emily Rosenberg Emily.Rosenberg@keeblerandassociates.com or 920-593-1705

2013 Prepared by Keebler & Associates, LLP All Rights Reserved.

TO ORDER THIS CHART AND/OR FOR MORE EDUCATIONAL INFORMATION CONTACT: EMILY.ROSENBERG@KEEBLERANDASSOCIATES.COM

3.8% NIIT
Target Roth IRA conversion amount Current taxable income

PEP

39.6% tax bracket

35% tax bracket 33% tax bracket 28% tax bracket 25% tax bracket
I.

Robert S. Keebler, CPA, MST, AEP: Applying the 3.8% Net Investment Income Tax
Charitable Remainder Trusts
1. Substantive Sale CRT (Standard CRT) CRT to Eliminate or reduce/defer the 3.8% NIIT and 5% incremental capital gains tax upon sale of a II. Trust beneficiaries may be subject to the NIIT when they receive annuity or property, security, or business interest. CRT unitrust distributions, though smoothes out gain to avoid the 3.8% tax or the incremental capital gains tax III. Under the proposed regulations, net investment income (NII) is a new category of income under the section 664 ordering rules 2. Retirement CRT (Flip-CRT) CRT to harvest annual real estate and securities IV. It is treated as the first category distributed, before ordinary income gains while harvesting losses in your outside account. Flip trust upon retirement when V. But, the accumulated NII of a CRT includes only amounts received by the trust distributions will not be subject to the 3.8% tax or the for tax years beginning after December 31, 2012 incremental capital gains tax. 3. Income Shifting CRT (Standard CRT for children) VI. Thus, amounts of NII received by a CRT in an earlier tax year are not subject to CRT to eliminate or reduce/defer the 3.8% NIIT and the NIIT when distributed to a beneficiary regardless of when the distribution 5% incremental capital gains tax while shifting the is made incidence of taxation to children and grandchildren
Charitable remainder trusts are also exempt from the NIIT (Reg. 1.1411-3(b))

15% tax bracket

10% tax bracket

Step 1: Develop a 10 to 15 year projection of income and deductions and compare these projections to the various taxes Step 2: Develop an analysis to determine the clients permanent tax bracket. Analysis will test whether an intra-bracket conversions increase the 3.8% NIIT, the AMT, impact of PEP/Pease, or the 39.6% tax rate Step 3: Develop a series of bracket-crossing conversions analysis. Each analysis must be measured autonomously standing on its own and take into account the various taxes Step 4: Repeat the above taking into account changes in value and the opportunity to recharacterize

Donor
(Income Beneficiary)

Transfer of cash, stock and/or other assets Annual (or more frequent) payments for life (or a term of years)

Non-Grantor Charitable Lead Trusts

A Charitable Lead Trust (CLT) is a split interest trust consisting of an income interest and a remainder interest. During the term of the trust, the income interest is paid out to a named charity. At the end of the trust term, the remainder (whatever is left in the trust) is paid to non-charitable beneficiaries (e.g. children of the donor) that have been designated in the trust document.

CLT
At the donors death (or at the end of the trust term), the remainder beneficiaries receive the residual assets held in the trust

Charity
(Income Beneficiary)
Wage Income Interest Income

Individual IRC 170 Deduction $260,000 $100,000

$50,000

Trust - 642(c) Deduction Interest Income Dividend Income MAGI Less: Charitable Deduction AGI $100,000 $50,000 $150,000 ($150,000) $0 $0

Donors Children
(Remainder Beneficiary)
2013 Prepared by Keebler & Associates, LLP All Rights Reserved.

Charitable deductions dont help individuals with the NIIT They dont reduce MAGI because they are below-the-line deductions taken on line 40 of Form 1040 They dont reduce NII because only properly allocable deductions paid or incurred to produce the income can be deducted for NIIT purposes and the charitable deduction is not a cost of producing the income The Income tax charitable deduction can be used to reduce the NIIT on charitable lead annuity trusts (CLTs)

Dividend Income MAGI Less: Threshold Exemption Subtotal Lesser of Excess over Threshold or NII NII Tax at 3.8%

$410,000 ($250,000) $160,000

NII Tax at 3.8%

$150,000 $5700