United States

GOP healthcare bill failure means net investment income tax lives on

TAX ALERT  | 

In the wake of the recent failure of the House GOP to pass their proposed repeal of the Obama-era Affordable Care Act (ACA), House Speaker Paul Ryan has indicated that taxes imposed by the ACA would remain in effect, even through any future tax reform effort. Although no specific taxes were mentioned by Speaker Ryan during the press conference, this would appear to include the 3.8 percent surtax on net investment income for higher-income individuals (also known as the section 1411 tax).

Of course, statements made in press conferences are entirely non-binding, and it is quite possible that the net investment income tax could find itself back on the table as Republicans in Congress and the administration press on towards tax reform. In fact, repeal of the net investment tax is specifically mentioned in the GOP tax reform blueprint published in June 2016, and Speaker Ryan has indicated his continuing desire for legislative action on healthcare during the current congress. However, for now the net investment income tax remains the law of the land, and taxpayers should continue to plan accordingly. Even if tax reform were enacted later this year, and did change or repeal some of the ACA taxes, the effective date could well be no earlier than 2018.

Taxpayers who may have been considering options to restructure to minimize net investment income taxes (or the related self-employment tax), but who put those options on hold in the expectation that the taxes might be speedily repealed or modified, may wish to reevaluate.

As a reminder, the regulatory regime surrounding the net investment income tax (and the related self-employment tax issues) is still not fully developed. There is uncertainty regarding the scope of the ‘limited partner’ exception from self-employment tax. In addition, regulations applying the net investment income tax to dispositions of partnership interests and S corporations are still in proposed form, and no regulations clarifying the application of the passive activity loss rules to trusts and estates (including for net investment income tax purposes) have even been proposed. With all tax regulations still being subject to the regulatory freeze promulgated at the start of the Trump administration, it could be a while before these and other similar issues are resolved. Tax uncertainty has its costs, but it also may present opportunities for prudent tax planning.

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