One of the more recent taxes we have seen enacted is the net investment income tax. This tax took effect in 2013 to help fund the Affordable Care Act. First of all, it is important to note that this is an additional tax. The tax is equal to 3.8% of the lesser of:
1.) The individual’s net investment income OR
2.) The excess of the individual’s modified adjusted gross income over the threshold amount ($250,000 for a joint return and $200,000 for a single return).
Another important note to point out is that estates and trusts are also subject to the net investment income tax (NIIT, as we accountants call it for short).
The following items are some of the components of investment income: interest, dividends, capital gains, rental and royalty income, nonqualified annuities and passive activity income. Rental income can be exempt from the NIIT if the taxpayer is a real estate professional and materially participates – there are certain criteria that have to be met to qualify for the exemption. If income is exempt for regular income tax, then it is also exempt for purposes of NIIT, such as tax-exempt interest and gain from sale of principal residence. Other exemptions include wages, unemployment income, alimony, and social security benefits.
There are some deductions that may be taken against net investment income to reduce the income subject to the NIIT. Some of the deductions include investment interest (only the amount that was allowed as an itemized deduction), investment expenses related to the production of investment income, state and local income taxes imposed that are allocable to the net investment income, fees paid for tax preparation allocable to the investment income, and other miscellaneous itemized deductions allocable to investment income.
Please feel free to contact us if you have any questions about the net investment income tax.