Episode # 62 – Why NOW Is The Best Time To Start A Business – with Mike Kelly, CPA

When President Obama signed the “Affordable Care Act”, aka Obamacare, it came with a pretty significant tax bite called the Net Investment Income Tax (NIIT).

From the IRS:
“The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts.”

Now, you may be thinking, “I don’t have anywhere near $250,000 in MAGI to worry about this tax. So, what’s the big deal?”

But the IRS also states: “Taxpayers should be aware that these threshold amounts are not indexed for inflation”?

Not indexed for inflation… Hmmmm..where have we heard that before? Oh yeah, the provisional income rules for the taxation of Social Security benefits as well as the Alternative Minimum Tax.

When the legislation to tax Social Security and then the Alternative Minimum Tax were first enacted very few people were affected, thus no outrage, as only “the rich” paid. Now almost everyone pays some tax on their Social Security benefits. (As of the 2017 tax bill fewer taxpayers are caught in the AMT web, thankfully.)

Pretty sneaky, eh? Oh, but it gets worse. How is Net Investment Income derived? Again, straight from the IRS website:

What are some common types of income that are not Net Investment Income?
Wages, unemployment compensation; operating income from a nonpassive business, Social Security Benefits, alimony, tax-exempt interest, self-employment income, Alaska Permanent Fund Dividends (see Rev. Rul. 90-56, 1990-2 CB 102) and distributions from certain Qualified Plans (those described in sections 401(a), 403(a), 403(b), 408, 408A or 457(b)). (emphasis mine)

Here the IRS is telling us that distributions from retirement accounts are NOT subject to the NIIT, which is factually correct.

What they don’t say is that distributions from retirement accounts are counted as income to determine if you need to pay the NIIT on your dividends, interest and capital gains. Some might even call this an error of omission. I certainly do.

Let me give you an example of how this works.

You are single. You have $180k income. You take a $50k IRA distribution. Your total income now is $230k. That $50k IRA distribution is not subject to NIIT. But if you have capital gains, interest and dividend income, those will be subject to the NIIT because that $50k IRA distribution put you above the $200k threshold!

Large distributions from your qualified accounts could add 3.8% to your tax rate on dividends, interest and capital gains. That is nearly a 25% tax increase!

Yeah, I get it. This tax won’t affect many people so it’s not a huge deal. Well, it’s not a big deal now but I assure you it will be because of inflation, just like taxes on Social Security.

So, what do you do to avoid this??? Take a guess…
Distributions from the Roth are not counted in your Adjusted Gross Income and thus will not ensnare you in NIIT trap.
Once again, YAY for the ROTH! Is there anything it can’t do?

In this episode I talk with Mike Kelly, CPA from Money And Life TV Youtube channel. And also www.moneyandlifetv.com.

Mike is a tenured CPA who has a lot to say about the new tax law, the Tax Cut and Jobs Act (TCJA).

Unfortunately, because the tax code is so complex and this is the first major change to it since 1986, there is a lot of confusion about it.

However, my friends, do not let confusion deter you from understanding as there is a lot of money at stake. It is up to you to know how YOU could be affected. You can start by watching Mike’s episode on this here.

Now, be advised, relying solely on your tax advisor or financial advisor may not be enough. Mike talks about the number of tax advisors retiring now due to the complexity of the new code. Change always causes commotion. But, again, this is YOUR money we’re talking about so it’s imperative YOU have some knowledge of how you can keep more of it!

In fact, I argue that the code will actually become a lot LESS confusing in the next year, after the dust settles and it’s been in place for a bit.  The 1040, for instance, will have a WHOLE new look to it in 2019. If you’re used to saying “Line 37 = AGI” I imagine you’re going to have to deal with some change.  Maybe AGI will be on line 18 or something? How nice would that be?

Simplification CAN lead to short term confusion but in the long run, simplification is a good thing.  So, don’t throw up your hands and say “I can’t figure this out!” and walk away from your understanding of the new code.  It’s YOUR money!  Did I say that yet???

Subscribe to Mike’s YouTube Channel. Listen to podcasts episodes such as this one.  Read as much as you can and you’ll gain a knowledge that most refuse to obtain. With that knowledge you will be much better positioned to improve your financial life.

This episode will help you do just that.

 


 

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