On January 1, 2013, the self-employment tax (the equivalent of social security tax for taxpayers who receive income from self-employment or investments instead of wages) increased from 4.2% to 6.2% and a 3.8% surtax was imposed on investment income (dividends, capital gains and passive rental income). For many taxpayers, these additional taxes constitute a significant reduction in their net income.
Tax compliant strategies exist which enable taxpayers to actively avoid both the self-employment tax and the investment income surtax. Section 1402 of the Internal Revenue Code and the regulations promulgated thereunder provide an exemption for distributions of partnership income to limited partners, provided such distributions are not guaranteed payments and provided the limited partners meet certain conditions. Through the use of multiple layers of limited partnerships, taxpayers may achieve complete exemption from the self-employment tax and the investment income surtax, thereby increasing their net income by as much as ten percent. In many cases, clients may achieve tax exempt status by simply restructuring their existing family limited partnerships.
If you wish to discuss the applicability of this strategy to your situation in regards to tax planning, please call us to schedule a consultation: 212-888-6600.