Net Investment Income Tax (NIIT) and the US taxpayer living abroad
The Net Investment Income Tax (NIIT) officially went into effect for the 2013 tax year. So, by now many individuals have had time to become acquainted with it. However, since the statutory threshold amounts by which NIIT applies is not adjusted for inflation, it is likely that with each passing tax year, more and more taxpayers will fall into the NIIT net.
Individual taxpayers are subject to a 3.8% NIIT on the lesser of their net investment income, or the amount by which their Modified Adjusted Gross Income (MAGI) exceeds a certain threshold determined by filing status as outlined below:
|Filing Status||Threshold Amount|
|Married Filing Joint||$250,000|
|Married Filing Separately||$125,000|
|Single / Head of Household (w/ qualifying person)||$200,000|
In general, net investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income and non-qualified annuities. It generally does not include wages, unemployment compensation, social security benefits, alimony, most self-employment income and IRS qualified retirement plans.
Americans taxpayers living abroad must be aware of NIIT and the application for their own individual situations. First, MAGI includes an adjustment for any income that is excluded by the Section 911 exclusion (otherwise known as the Foreign Earned Income Exclusion). Additionally, taxpayers with income from controlled foreign corporations (CFCs) and passive foreign investment companies (PFICs) may have additional adjustments that need to be made.
The NIIT is not considered to be an Income Tax under the strict definitions in the Internal Revenue Code. Therefore, it is generally viewed that no foreign tax credit may be claimed to reduce the NIIT imposed. This will often result in a tax payable to the US government and taxpayers who are used to not having any tax due with US filings should be aware that this is possible in future tax years where income exceeds the thresholds outlined above.
One other thing to note is that the exclusion of IRS qualified retirement plans from NIIT does not necessarily extend to foreign pensions. The determination of this is dependent on the jurisdiction of the pension, the type of pension (i.e. occupational versus personal pensions) and composition of contributions (i.e. makeup of employer versus employee contributions). In the case of pensions located in the UK, it is important to take advice from a dual qualified US-UK tax accountant with respect to your specific situation to ensure that you are not unknowingly caught out by the NIIT in current and future tax years.
For more wealth planning tips and tidbits from MASECO read our 39 Steps to Smart Living in the UK.
Risk Warnings and Important Information
The above article does not take into account the specific goals or requirements of individual users. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy.
MASECO LLP trading as MASECO Private Wealth is authorised and regulated by the Financial Conduct Authority, the Financial Conduct Authority does not regulate tax advice. MASECO Private Wealth is not a tax specialist. We strongly recommend that every client seeks their own tax advice prior to acting on any of the strategies described in this document.