What to Look For

Along with the Affordable Care Act (ACA) came the creation of the net investment income tax (NIIT), a 3.8% tax applicable to all unearned income for individuals with an income of $200,000 and couples with an income greater than $250,000. Among the types of passive income subject to the NIIT is any income from a flow through entity where the owner is not active in that business. If you are a business owner that has transferred some ownership of your business to a trust for estate planning purposes your active participation won’t carry over to the trust to allow it to avoid the NIIT.

The Opportunity

Since flow-through income from an active business is exempt from the NIIT, the distinction between passive and “non-passive” income is important for taxpayers trying to reduce their tax exposure. When a business owner moves company ownership into an irrevocable trust for estate planning, the trust is considered inactive and will attract the NIIT, even while the owner is active. However, the law supports the idea that a trustee who is active in the business causes the trust to be considered an active owner allowing the trust to escape the tax.

Related: Use a Roth IRA Conversion to Your Best Advantage

The Benefit

While the definition of “active” is unclear for trustees, the activities should be regular and continuous, though need not be full-time. This nuance can save the business owner a good deal of money. Since the 3.8% NIIT can significantly impact the trust’s tax liability, it is well worth your time to consult with your tax advisor to ensure that your trustees remain active in the business.

There are many other meaningful ways to stretch your dollar in our new e-book: 12 (More) Great IdeasDo you have a question about how this information applies to you? Email Jim Sacher, CPA or call him at 440-449-6800.

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