The Fate of the Net Investment Income Tax Under GOP Tax Reform

The great tax reform specified by the Tax Cuts and Jobs Act undoubtedly represents essentially the most important overhaul of the U.S. tax code, and tax system generally, in a number of a long time. Its success or failure over time might very nicely decide the fiscal legacy left by Donald Trump’s presidency.

Whereas most of the provisions specified by early iterations of the GOP-led tax reform got here to fruition beneath the enacted laws, one evident exception is the initially deliberate repeal of the three.eight% Internet Funding Revenue Tax.

The NIIT

To briefly clarify how the tax works, taxpayers who’ve revenue from investments (equivalent to curiosity, dividends, capital features, rental and royalty revenue, amongst others) are typically topic to a three.eight p.c tax on the lesser of their web funding revenue or the quantity by which their modified adjusted gross revenue exceeds sure statutory threshold quantities primarily based on their submitting standing.

The edge quantity for married taxpayers submitting collectively is $250,000, for single and head of family taxpayers is $200,000, and it’s $125,000 for married taxpayers submitting individually.

Preliminary Requires Repeal

Some unique tax plan proposals particularly referred to as for the repeal of the Internet Funding Revenue Tax, and the political motivations for doing so appeared self-evident on the time. The NIIT was enacted beneath the 2010 well being care laws with a purpose to assist partially increase funds to pay for the Inexpensive Care Act. Republicans have since been seeking to abandon each the well being care system and the taxes imposed with a purpose to fund it.

Nevertheless, close to the tip of negotiations, based on a Dow Jones information report, Congressional Republicans started contemplating conserving the tax intact with a purpose to fund different authorities initiatives, equivalent to paying subsidies to healthcare shoppers who purchase insurance coverage or different methods of creating insurance coverage extra reasonably priced for low-income households.

The Results of Non-Repeal

One of many greater surprises within the remaining Republican tax reform invoice was the retention of the NIIT. Retention of the tax comes with a variety of implications, relying on the tax profile of the person.

For U.S. residents residing overseas, as an example, the Internet Funding Revenue Tax might be significantly important. It’s because the foreign tax credit can’t be used to scale back the tax. Consequently, a U.S. citizen residing overseas who in any other case has 100% foreign-source revenue and adequate international tax credit to credit score towards such revenue can nonetheless find yourself paying U.S. federal revenue taxes by advantage of the NIIT.

Questions nonetheless stay as to how the NIIT can be utilized within the case of recent classes of revenue that had been created by the Tax Cuts and Jobs Act of 2017 for U.S. individuals with issues overseas. One instance is “international intangible low-taxed revenue” (GILTI), mainly non-routine revenue of a managed international company (CFC), which should be at present included as revenue by sure of the CFC’s U.S. shareholders. For now, it’s unclear whether or not the surtax needs to be utilized to GILTI inclusions, though most tax practitioners imagine that the IRS will advise that it needs to be included because of the typically passive nature of the revenue.

For now, it seems to be just like the Internet Funding Revenue Tax is right here to remain. Additional printed steerage by Treasury and IRS can be welcome with a purpose to perceive the nuances of the actual tax shifting ahead.