As a U.S. expat, understanding and managing both domestic and international tax obligations can often seem overwhelming. Among these obligations is the Net Investment Income Tax (NIIT), a lesser-known yet crucial tax provision. Established as part of the Affordable Care Act in 2013, NIIT imposes a 3.8% tax on certain types of investment income for individuals, estates, and trusts whose incomes exceed specified thresholds.

This tax affects U.S. citizens worldwide, irrespective of their residence or the origins of their income. Grasping how NIIT specifically impacts U.S. expatriates is essential—not only for ensuring compliance but also for effectively managing and potentially minimizing tax liabilities.

This article aims to clarify the intricacies of NIIT, highlight its implications for U.S. expatriates, and offer strategic advice on how to manage this tax efficiently while living abroad.

WHAT IS NET INVESTMENT INCOME TAX?

The Net Investment Income Tax is a 3.8% tax on the lesser of an individual’s net investment income or the amount by which their modified adjusted gross income (MAGI) exceeds specified threshold amounts based on their filing status. NIIT applies to the net investment income of individuals, estates, and trusts that have income above certain thresholds. Considered net investment income includes income from assets like stocks, bonds, rental income, and some annuities, which are essential for calculating the Net Investment Income Tax based on the threshold and the actual net investment income. To determine net investment income, one must subtract eligible deductions from the gross investment income, which encompasses earnings such as brokerage fees, investment advisory fees, tax preparation charges, local and state income taxes, fiduciary expenses, investment interest expenses, and costs involved with rental and royalty income.

FILING AND PAYMENT

Taxpayers may need to adjust their income tax withholding or estimated payments to account for the tax to avoid penalties. The NIIT is reported and paid by individuals on Form 8960, Tax on Net Investment Income, which is filed with the individual’s Form 1040 federal income tax return.

(more…)

We wanted to share with you a topic discussed at last week’s live Q&A session, which was held during one of this spring’s Fundamentals of Flow-Through® Partnership, LLC & S Corporation Tax Seminars. FYI: As noted below, there are two more spring programs coming up shortly!

Many of us are advisors to clients who have created family limited partnerships (“FLPs,” generally formed as LLCs), which hold marketable securities and often have been used to make “discounted” gifts to family members. Presumably, when such an FLP has been formed, the investment company rules of §721(b) have been properly navigated to avoid gain recognition on the contribution of any appreciated securities to the FLP. Very generally, gain will be recognized on the contribution of appreciated property to a partnership when, post-contribution, more than 80% of the value of the partnership’s assets consists of stock and securities (even if non-marketable) and the contributor obtains “diversification.”

What sometimes has been overlooked is that the rule is NOT that a contribution of stock or securities to an investment company can be taxable, rather a contribution of any property to an investment company where the contributor obtains diversification is taxable to the contributor. For example, assume there is an FLP that holds exclusively stock and securities with a value of $1.8 million, which FLP is owned by non-grantor trusts created for family members. Parent decides to contribute to the FLP a parcel of appreciated real estate (held in a single-member LLC) having a value of $200,000 in exchange for a 10% FLP interest with a view to making gifts of the 10% FLP interest at a later date. This contribution will be taxable to the parent, because (1) post-contribution the FLP is an investment company by virtue of more than 80% of its assets consisting of stock and securities, and (2) parent has obtained diversification by reason of “exchanging” 100% ownership of the real estate for a 10% interest in the real estate and a 10% interest in the stock and securities owned by the FLP.

It is easy to avoid this trap. Just form a new FLP (that is a recognized entity) and make gifts to the same trusts that had received gifts of interests in the securities FLP. The cost of a new and virtually identical FLP agreement should not be too costly, and the cost of filing an additional partnership tax return likely is relatively small.

(more…)

Understanding the intricate web of sales tax nexus thresholds is key for businesses navigating the complexities of state taxation laws. As the digital age continues to reshape traditional business models, the concept of nexus—the connection between a business and a taxing jurisdiction—has become a focal point in determining tax obligations. Nexus can be created by physical presence (i.e.; employees or contractors in a state, an office, or inventory) or economic .

The table below aims to shed light on the diverse nexus thresholds established by individual states across the United States when determining economic nexus for sales tax. Each state presents its own set of criteria that trigger nexus for sales, income, and other tax purposes. By delineating these thresholds, businesses can proactively strategize their operations to ensure compliance and mitigate potential liabilities.

As a business operating in one, or many, of these states, its truly vital that you have clear knowledge of their tax regulations and nexus thresholds.

Things can get a little messy in these matters, so consult the below table, consider your individual fact pattern and then come to Miles Consulting  – we’ll help you understand your unique tax challenges, whatever state you’re in. Our professionals can help with sales tax compliance (filing returns when and where you need to), retroactive remediation, merger and acquisition due diligence, and audit support, among others.

We start most conversations with clients by talking about nexus because that determination is the starting point of a relationship with a state and its taxing authority. Once nexus is established, a company has an obligation to then determine if its products and services sold to customers in that state are subject to sales tax, whether there are relevant exemptions, and then their requirements to file sales tax returns. Nexus is just the first step in the process of becoming compliant.

(more…)

So, you’re selling a product…to customers…in all states in the US.  You’re a US company selling widgets or software or services, or you’re a foreign company selling gadgets – all destined for US customers (whether individual consumers or businesses). Business is growing, sales are increasing. Congratulations!

First next step? Determine if you need to be collecting and remitting sales tax on those sales.  Note – you probably do! And that starts with nexus.

When selling to US customers and then dealing with the many sales tax regulations in our 50 states, understanding the concept of nexus is paramount for businesses aiming to stay compliant and avoid potential penalties. Nexus, in essence, refers to the connection or presence that a business has in a particular state, which can trigger the obligation to collect and remit sales tax. However, determining whether a business has established nexus in a given jurisdiction requires a comprehensive assessment known as a nexus review.

What Is A Nexus Review?

A nexus review involves a thorough examination of various factors, including a business’s physical presence, economic activities, and digital footprint, to determine whether it has crossed the threshold to trigger sales tax obligations in the state, or states, in which it operates. This process is essential for businesses to assess their compliance status accurately and identify potential areas of risk. By understanding the intricacies of nexus reviews, businesses can proactively manage their sales tax responsibilities and navigate the complexities of multi-state taxation with confidence.

Let’s unpack that here – understanding economic nexus, physical presence, the review process and how to evaluate your business’s nexus requirements. Here’s a breakdown:

1. Understanding Economic Nexus & Physical Presence (whichever comes first)
   • Economic nexus, triggered by certain criteria, defines a business’s virtual presence in a state, necessitating sales tax compliance even without physical presence.
2. The Nexus Review Process
   • A step-by-step evaluation of a business’s activities and transactions to determine sales tax obligations, ensuring accurate compliance assessment.
3. Nexus Across Different States
   • Variations in state laws necessitate a nuanced understanding of nexus criteria, with some states following Multistate Tax Commission (MTC) guidelines.

(more…)

The Foreign Earned Income Exclusion (FEIE) is a significant tax benefit for U.S. expats, allowing them to exclude a portion of their foreign-earned income from U.S. taxation, which is a crucial aspect of expat taxes. To qualify, expats must pass either the Physical Presence Test or the Bona Fide Residence Test. This article focuses on the Bona Fide Residence Test, providing updated information for 2024 and detailing everything you need to know to claim it.

WHAT IS THE BONA FIDE RESIDENCE TEST?

The Bona Fide Residence Test is a of two methods for American expats to qualify for the FEIE. To qualify, expats must pass either the Physical Presence Test or the Bona Fide Residency Test, which focuses on economic and social ties to a foreign country, uninterrupted residency, and subjective qualifications. This test is more subjective and often harder to pass, as the IRS scrutinizes your intentions and ties to the foreign country.

HOW DO YOU QUALIFY FOR THE BONA FIDE RESIDENCE TEST?

To qualify for the Bona Fide Residence Test in 2024, you must meet several criteria:

1. U.S. Citizen or Resident Alien: You must be a U.S. citizen or a resident alien.
2. Uninterrupted Period: Establish residency in a foreign country for an uninterrupted period that includes an entire tax year. This means that you must live in the foreign country for a continuous period that covers the entire calendar year.
3. No Intentions to Return: Demonstrate that you have no immediate plans to return to the U.S. and that you have strong ties to the foreign country.
4. Strong Ties: Establish strong connections to your foreign residence, such as employment, property ownership, family presence, and social ties.

Meeting these criteria helps determine if you qualify as a bona fide resident abroad for IRS purposes.

WHAT ARE THE COMMON PITFALLS?

Here are some common pitfalls to avoid:

(more…)

INTRODUCTION
This document,1 prepared by the staff of the Joint Committee on Taxation (“Joint Committee staff”), provides a summary of the present-law Federal tax system as in effect for 2024. The current Federal tax system has four main elements: (1) an income tax on individuals, estates, trusts, and corporations (which consists of both a “regular” income tax and, in the case of individuals and certain large corporations, an alternative minimum tax);2 (2) payroll taxes on wages (and corresponding taxes on self-employment income) to finance certain social insurance programs; (3) estate, gift, and generation-skipping transfer taxes; and (4) excise taxes on selected goods and services. This document provides a broad overview of each of these elements.

Several aspects of the Internal Revenue Code of 1986 (the “Code”) are subject to change over time. For example, some dollar amounts and income thresholds are indexed for inflation, including the standard deduction, tax rate brackets, and the annual gift tax exclusion. In general, the Internal Revenue Service (“IRS”) adjusts these numbers annually and publishes the inflation adjusted amounts in effect for taxable years beginning in a calendar year before the beginning of such calendar year. Where applicable, this document generally includes dollar amounts in effect for 20243 and notes whether dollar amounts are indexed for inflation.4

In addition, many provisions in the Federal tax laws are temporary or have parameters that change over time according to the statute. For simplicity, this document describes the Federal tax laws in effect for 2024, as of the date of publication, and generally does not include references to provisions as they may be in effect for future years or to termination dates for expiring provisions.5

READ FULL REPORT

According to an article in The Kiplinger Report, the five most expensive US States to live in are California, Hawaii, New York, New Jersey, and the District of Columbia.

California

Not surprisingly, California takes first place as the most expensive state for millionaires. The Golden State recently raised its top income tax bracket by 1.1%, from 13.3% to 14.4%.  But California was the most expensive state for high earners last year, too, before the increase took effect.

Hawaii

Hawaii is an expensive state for high earners to live in. The top income tax rate is 11%. And notably, you don’t need to be a millionaire for the state to tax some of your income at that rate.

• Single and married filing separately taxpayers will pay 11% on more than $200,000 of taxable income.
• Heads of household pay the 11% tax rate on more than $300,000 of taxable income.
• Joint filers pay 11% on more than $400,000 of income.

New York

It’s no surprise that New York taxes high earners at one of the highest rates in the U.S. The top income tax bracket in the state is 10.9%. However, only taxpayers with taxable incomes greater than $25 million fall into this bracket. If your taxable income falls between $1 million and $25 million, you can expect to be subject to a tax rate of anywhere between 6.85% and 10.3%, which is still high compared to most other states.

(more…)