March 2015 Volume IX No. 1 Taking Care of Business
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Planning for the Net Investment Income Tax

Keith Wolak

One of the byproducts of the Affordable Care Act is a new tax called the Net Investment Income Tax (NIIT). This is an additional 3.8% tax on income for certain high income taxpayers who have investment income.

The calculation is somewhat complex, but generally, if you have a Modified Adjusted Gross Income (MAGI) above the below thresholds and you have investment income, you will likely owe this additional tax in April:

Married Filing Jointly or Qualifying Widow(er) $250,000
Married Filing Separately $125,000
Single or Head of Household $200,000
Undistributed Trust or Estate Income $12,500

When planning for this tax there are two factors to consider. First, the items of income will push you over the above thresholds. Second, the items of income will be specifically treated as Net Investment Income and therefore subject to the additional tax.

Avoiding Going over the MAGI

General tax deferral and avoidance strategies also work in deferring or avoiding the MAGI limit for purposes of this NIIT. For example, Installment Sale Reporting or Like Kind Exchange Treatment on the sale of an asset can defer the recognition of income that could otherwise trigger NIIT liability. Similarly, taking retirement payments over time rather than in a lump sum, or investing in Tax Exempt investments in the first place, can defer or delay triggering NIIT liability.

Gifts of appreciated property to charity or family can also avoid spikes in MAGI when those items are sold, and thus the application of the NIIT. You could also reduce your MAGI with contributions to retirement accounts to reduce reportable income. If cash resources are needed in a year where MAGI is a concern, consider borrowing money rather than taking taxable distributions from retirement accounts. Borrowing sources could include S Corp distributions to the extent of basis, Roth IRAs, and Life Insurance Cash Surrender Values.

Business owners can also utilize other traditional tax deferral methods such as accelerated deprecation, paying employee bonuses or accelerating other discretionary expenses in high income years, or selling assets that will generate losses to offset income. Keep in mind that net capital losses are still carried over to the next year for this purpose, you can only offset $3,000 against your ordinary income sources.

Avoiding the Net Investment Income

This income includes interest, dividends, net capital gains, rental and royalty income, non-qualified annuities, business income from trading financial instruments and commodities, and business income from passive activities. Items that are NOT included in this tax base are wages, unemployment compensation, operating income from a non-passive business, social security benefits, alimony, tax-exempt interest, self-employment income, and distributions from qualified retirement plans.

The largest unexpected taxed income appear to be passive rental income. However, the IRS does not include rental income as passive where the owner of a business rents real estate to a business he actively participates in operating. Special care should be taken at the time of liquidation of a Partnership or S Corporation interest as certain pass- through items could result in the recognition of Net Investment Income.

In sum, a 3.8% tax is not catastrophic, but it may serve to increase awareness of yearend tax planning strategies when timing can make a difference.

If you have questions regarding the Net Investment Income Tax, or other similar issues, please contact your HWE relationship attorney or visit us at

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Social Security Benefits: In Context

Keith Wolak

A key component of retirement planning is estimating what we will receive from Social Security when we retire. But thinking about Social Security is not just for those 60 and over, so let’s put Social Security into context.

Social Security benefits are calculated based on your highest paid 35 years of work. If you have less than 35 years on record, you have zero earnings for those years. When you have more than 35 years of work, your lowest earning years drop off. In 2014 earnings above $117,000 were disregarded for purposes of this calculation. To put this in context, the highest retirement benefit payable at full retirement age in 2014 was $2,642 per month.

Social Security also provides survivor benefits for a spouse and minor children, disability benefits for the taxpayer, and a small death benefit. If you would like an estimate of those benefits, take a look at your Social Security Benefit Statement. This statement is a mere projection based on your historical information. The impact of wage changes, working less than 35 years, and timing of retirement can impact these estimates significantly.

Prior to 2011, everyone received their benefit statements in the mail bi-annually. In 2011 Congress attempted to reduce mailing cost ($70 million annually) by only issuing electronic versions via the SSA website. As of 2014 there is a hybrid approach as follows:

  • Prior to your 25th birthday you will receive your first statement by mail, and you will receive another every 5th year thereafter
  • Upon attaining age 60, statements will be sent every year
  • However, IF you sign up to view statements online, you won’t receive ANY paper statements
  • You can register for online statements at by creating a User Name and Password (Be Warned that Password may require updating every 6 Months)

Please note that according to Social Security estimates, without prior changes, beginning in 2033 the Social Security Administration will only be able to fund 77% of the scheduled benefits reflected on these Benefit Statements.

In addition to checking your benefits, there are other reasons to check your statements every year. If your income or your taxes are not included in your report, it could be a sign that your employer is not reporting your income, or worse, not remitting your withheld FICA taxes. If the amount reported by Social Security is greater than your actual wages, it may be a sign that your identity has been stolen and an someone is using your Social Security number to obtain employment. This will also become a problem when the IRS contacts your for under reporting your “income.”

As you can see, there are many factors that enter into obtaining a reliable estimate of benefits. Similarly, there are also strategies to maximize those benefits as you near retirement. We will address those strategies in a future installment.

If you have questions regarding Social Security benefits, or other similar issues, please contact your HWE relationship attorney or visit us at

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DISCLAIMER: This publication is not intended to be legal advice but is presented for informational and educational purposes only. The facts and circumstances of a specific legal issue are unique and you should seek legal advice for your specific questions or concerns. No attorney-client relationship is created.