High-income individuals have to navigate through quite a few issues when it comes to U.S. income tax. Generally, individuals are required to pay more income tax as their earnings increase and as they move up to higher tax brackets. We’ve compiled a list of common issues to consider for your high-income clients as tax season approaches.
The alternative minimum tax (AMT) is an additional tax imposed on taxpayers that have alternative minimum taxable income over a certain threshold. IRS Form 6251 is used to determine a taxpayer’s alternative minimum taxable income. In order to determine this income, certain itemized deductions and tax breaks are added back to adjusted gross income (AGI). Some of those deductions include:
Once these deductions and tax breaks are added back into the adjusted gross income, the taxpayer then subtracts an exemption amount (see below).
The exemptions phase out as the taxpayer’s income passes a certain threshold. Phasing out begins at the following levels:
After calculating the alternative minimum taxable income and subtracting the exemption, the remainder is subject to one of two tax rates. For the tax year 2016, AMT tax rate was 26 percent if income was $186,300 or less (for all filers except married filing separately) and 28 percent if income was more than $186,300 (for all filers except married filing separately).
Understandably, this tax can be very confusing for taxpayers who are required to fill out the form. You can help your clients navigate the AMT.
Net investment income tax (NIIT) is assessed on “unearned income” at 3.8 percent if the taxpayer earns more than $250,000 (married filing jointly), $200,000 (single), or $125,000 (married filing separately). The “unearned income” includes: interest, royalties, rental income, dividends, and nonqualified annuities.
NIIT can be imposed on estates and trusts when the adjusted gross income passes a certain threshold. This tax is also imposed on resident aliens along with U.S. citizens. Nonresident aliens are not subject to NIIT.
In order to pay NIIT, taxpayers must calculate their modified adjusted gross income (MAGI). MAGI is adjusted gross income increased by the difference between amounts excluded from gross income under section 911(a)(1) and the amount of any deductions or exclusions disallowed.
Individuals, estates, and trusts will use Form 8960 to compute their NIIT.
Personal exemptions and itemized deductions phase-out for taxpayers as their income crosses a threshold amount. These threshold amounts include:
The amount of itemized deductions are reduced if the taxpayer’s AGI exceeds the threshold. The reduction is either 3 percent of the amount by which AGI exceeds the threshold or 80 percent of total itemized deductions, whichever is less.
The itemized deduction worksheet can be found in the Instructions for Schedule A.
High-income individuals also need to plan for tax on their estates. Estate tax is a tax on the right to transfer property at the time of a taxpayer’s death. The total value of these items is called “Gross Estate” which is then reduced by certain deductions to arrive at the "Taxable Estate." The estate tax is imposed on an estate’s value that exceeds a certain exemption level. For the 2017 tax year, this exemption is at $5.49 million for individuals. Once taxable gifts exceed this amount, a federal estate tax return (IRS Form 706) along with an estate tax payment is required by the IRS.
High-income taxpayers have a unique set of issues for their tax returns. These issues can become very complicated and tangled without assistance from a qualified tax professional. With proper tax planning, many of these additional tax obligations can be managed and minimized if possible.
For more information on tax planning you can check out 17 Key Tips for Year-end Tax Planning.