CPA Groups Ask for Clarification on Net Investment Income Tax Rules

In a letter sent to Congress last week, the American Institute of CPAs (AICPA), the Virgin Islands Society of CPAs (VISCPA), and the Guam Society of CPAs (GSCPA) sought clarification regarding net investment income tax (NIIT) applicability to bona fide residents of the US Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands.

Specifically, the 10-page letter, which was submitted on August 7, requests clarification as to whether the NIIT is considered a mirrored tax to be collected by tax authorities for the US Virgin Islands, Guam, and the Mariana Islands.

Under the “mirror code” system of taxation, the substantive provisions of the Internal Revenue Code are applicable as the income tax laws of the three US territories.

“The wording of proposed and final [IRS] regulations regarding NIIT appears to exempt from the NIIT bona fide residents of the US territories; however, the VIBIR (Virgin Islands Bureau of Internal Revenue) has issued a statement and the GDRT (Guam Department of Revenue and Taxation) deputy tax commissioner has stated that the NIIT applies to bona fide residents of the US territories, causing much confusion among taxpayers and practitioners,” the three CPA groups wrote in the letter. “Clarity on the applicability of the NIIT to bona fide residents of the US territories is needed. Practitioners and taxpayers need clarity in order to file 2013 tax returns by the extended due date of October 15, 2014.

“The AICPA, VISCPA, and GSCPA believe, as a matter of clarity and fair interpretation and application of congressional intent, Congress should request that Treasury provide clarification on whether the NIIT applies to bona fide residents of the mirror code US territories,” the letter continued. “In addition, if bona fide residents of mirror code US territories are exempt from the NIIT, the extension of this exemption to mirror code US territories estates and trusts should be clarified as well.”

The NIIT is considered a significant tax provision under the Affordable Care Act. Imposed by Section 1441 of the Internal Revenue Code, the NIIT is applied at a rate of 3.8 percent to the lesser of a taxpayer’s net investment income or the excess above the modified adjusted gross income thresholds of $250,000 for joint filers, $125,000 for married filing separately, and $200,000 for single filers.

For a trust or estate, the surtax is equal to 3.8 percent of the lesser of the undistributed net investment income or excess adjusted gross income over the dollar amount at which the highest income tax bracket applicable to the estate or trust begins. The dollar amount for 2013 returns is $11,950. For 2014, the threshold amount is $12,150.

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