www.pwc.com/jp/ias International Assignment Services Alert Net Investment Income Tax October 2013 ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・ The Net Investment Income Tax (NIIT) went into effect on January 1, 2013 as part of the Health Care and Education Reconciliation Act of 2010. The NIIT will impose a 3.8% tax on various types of investment income to individuals, trusts, and estates in excess of certain thresholds. The new tax is also part of the tax payment requirements for 2013 (i.e., estimated tax payments). ・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・・ Understanding the Net Investment Income Tax and its impact on US taxpayers in Japan Individuals with Modified Adjusted Gross Income (MAGI) above USD 200,000 for single and head of household taxpayers; USD 125,000 for married filing separately taxpayers; and USD 250,000 for married filing jointly and qualifying surviving spouse may be subject to the NIIT. The threshold for trusts is USD 11,950. Most taxpayer’s MAGI is equal to their Adjusted Gross income (AGI). The difference between the two is that deductions under Internal Revenue Code §911 dealing with foreign earned income exclusions are added back to AGI to arrive at MAGI. An item to be aware of is that only the foreign earned income exclusion is added back to the AGI; the housing exclusion is not. Please note that the NIIT is separate from the payroll Medicare Tax paid through FICA tax withholdings. Thus, individuals who are exempt from FICA Medicare Tax withholdings may still be subject to the NIIT if they have net investment income above the applicable threshold. International Assignment Services Alert Example — Bill is single ($200,000 NIIT threshold) and is no longer paying into the US social security system. He has wage income of $185,000 and interest income of $25,000. He has no itemized deductions. His MAGI is $210,000. He is subject to NIIT on $10,000 — the lesser of net investment income ($25,000) or income above the threshold ($10,000). Investment income includes gross income from interest, dividends, annuities, rents, and royalties (other than derived from an active trade or business), as well as net capital gain. Other income will also be subject to the new tax, including income from limited partnerships or from other pass-through entities in which a taxpayer does not materially participate (as determined under the passive activity loss rules). Certain types of income have been excluded from the definition of NIIT, e.g. earned income – wages and self-employment income, so called active trade or business income, distributions from qualified retirement plans or IRAs, social security benefits, exempt interest on municipal bonds, and excludable portion of gain on a primary residence sale. Note that even though these items are not subject to NIIT, they will be components in making up AGI/ MAGI (and thereby, increasing the likelihood that the tax will apply). Certain deductions may be taken against net investment income. Some of these include investment interest expense, investment expense, and allocable state and local income taxes. These expenses are allowed to the extent they are deductible when calculating ordinary income for regular tax purposes. Inclusion of income from Controlled Foreign Corporations (CFCs) and Passive Foreign Investment Companies (PFICs) are based on a number of circumstances and elections which should be evaluated on case by case basis. If you have investments in CFCs and/or PFICs, you should consult with your tax advisors regarding your various options. One major unique feature of this NIIT is the diversion from the regular foreign tax credit (FTC) concept. Because of how the new NIIT is codified in the Internal Revenue Code, FTC cannot be used to offset the NIIT. A similar result may occur on the Japan side. Although this may not have been the intended result, it potentially could also lead to double taxation for US citizens (or greencard holders) who are permanent resident taxpayers. Clarification is needed from the IRS on this FTC matter and whether treaty relief may be available. However, until such clarification is obtained, US taxpayers who have not needed to make U.S. estimated tax payments in the past may now be required to make payments for the 2013 tax year due to this FTC disallowance. Example A — Mike is a single ($200,000 NIIT threshold) expatriate who lives in Japan for the entire tax year. His wage income is $349,700 and he has $35,000 of interest and dividend income. He has no itemized deductions, and is able to take the full Foreign Earned Income Exclusion and Housing Exclusion in Tokyo of $97,600 and $117,100 respectively. Mike's AGI is $170,000 (349,700 – 97,600-117,100 + 35,000); however, his MAGI would be calculated as $267,600 (170,000 + 97,600). He is subject to NIIT on $35,000 — the lesser of net investment income ($35,000) or income above the threshold ($67,600). Example B – Same facts as above, we will also assume that Mike has enough eligible Foreign Tax Credits to cover all the income tax on his AGI of $170,000 with $2,000 of FTC leftover. However, Mike will still have a tax due of $1,330 from NIIT (35,000 x 3.8%) because he is not allowed to use the remaining $2,000 of FTC to offset his NIIT. Non-resident Aliens (NRAs) are not subject to the NIIT. In the case of a U.S. citizen or resident who is married to a non-resident alien, and the NRA elects to be treated as a US resident to file a joint tax return, the spouses will nevertheless be treated as married filing separate (MFS) taxpayers for the purposes of calculating NIIT. The U.S. citizen or resident spouse will be subject to the threshold amounts for a MFS taxpayer, and the nonresident alien will not be subject to NIIT. Under general income tax rules, married taxpayers in which the spouse is a U.S. citizen or resident who is married to a NRA may elect US residency to file a joint Federal income tax return. For purposes of NIIT, another separate election can be made for the NRA spouse’s income to be included in the NIIT calculation. Example 1 – Lucy, a U.S Citizen is married to Ricky, a NRA. Ricky has elected to be treated as a US resident and they have elected to file a joint Federal income tax return but have not elected to have Ricky’s investment income included for NIIT tax purposes. Lucy has wage income of $120,000 and interest income of $25,000. She has no itemized deductions. Her modified adjusted gross income is $145,000. Ricky has wage income of $100,000 and he has $15,000 of interest and dividend income. He has no itemized deductions. Ricky's modified adjusted gross income is $115,000. As they have not elected to include Ricky’s investment income, Lucy is treated as MFS for NIIT purposes and Ricky’s investment income is disregarded. As such, Lucy’s NIIT PwC 2 International Assignment Services Alert threshold is $125,000; she will be subject to NIIT on $20,000 — the lesser of net investment income ($25,000) or income above the threshold ($20,000). Example 2 - Same facts as above, except Lucy and Ricky have elected to include Ricky’s net investment income. This moves the NIIT threshold to $250,000. Lucy and Ricky’s combined wage income is $220,000 and they have $40,000 in interest and dividend income. Together, they are subject to NIIT of $10,000 – the lesser of net investment income ($40,000) or income above the threshold ($10,000). As the Internal Revenue Service had just issued a draft tax form of the NIIT and is still soliciting public comments on its proposed regulations, there may be further clarification on certain items as discussed above and the issuance of final regulations. PwC will provide an update once the information becomes available. For more information, please consult your international tax representative or contact any of the following members listed below: Zeirishi-Hojin PricewaterhouseCoopers International Assignment Services Kasumigaseki Bldg. 15F, 2-5, Kasumigaseki 3-chome, Chiyoda-ku, Tokyo 100-6015 Telephone: 81-3-5251-2400, http://www.pwc.com/jp/ias Partner Director Nasir Majid 81-3-3539-6310 [email protected] Marcus Wong 81-3-3539 6406 [email protected] Amy Tsang 81-3-3539 6330 [email protected] James Harris 81-3-3539-6389 [email protected] Andrew Greathouse 81-3-3539-6359 [email protected] PwC Japan Tax (Zeirishi-Hojin PricewaterhouseCoopers), a PwC member firm, is one of the largest professional tax corporations in Japan with more than 500 people. In addition to tax compliance services our tax professionals are experienced in providing tax consulting advice in all aspects of domestic/international taxation including financial and real estate, transfer pricing, M&A, group reorganisation, global tax planning, and the consolidated tax system to clients in various industries. PwC firms help organisations and individuals create the value they’re looking for. We’re a network of firms in 158 countries with more than 180,000 people who are committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at www.pwc.com This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. © 2013 Zeirishi-Hojin PricewaterhouseCoopers. All rights reserved. PwC refers to Zeirishi-Hojin PricewaterhouseCoopers, a member firm in Japan, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. PwC 3
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