The Net Investment income tax is an integral part of the Affordable Care and Patient Protection Act, created a new TAX to fund an expanded health care coverage American marketplace
Net Investment Income Tax FAQs
Basics of the Net Investment Income Tax
1. What is the Net Investment Income Tax (NIIT)?
The Net Investment Income Tax is imposed by section 1411 of the Internal Revenue Code (IRC). The NIIT applies at a rate of 3.8 percent to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts.
2. When does the Net Investment Income Tax take effect?
The Net Investment Income Tax goes into effect on Jan. 1, 2013. The NIIT will affect income tax returns of individuals, estates and trusts for their first tax year beginning on (or after) Jan. 1, 2013. It will not affect income tax returns for the 2012 taxable year that will be filed in 2013.
Who Owes the Net Investment Income Tax
3. What individuals are subject to the Net Investment Income Tax?
Individuals will owe the tax if they have Net Investment Income and also have modified adjusted gross income over the following thresholds:
|Married filing jointly||
|Married filing separately||
|Head of household (with qualifying person)||
|Qualifying widow(er) with dependent child||
Taxpayers should be aware that these threshold amounts are not indexed for inflation.
If you are an individual that is exempt from Medicare taxes, you still may be subject to the Net Investment Income Tax if you have Net Investment Income and also have modified adjusted gross income over the applicable thresholds.
4. What individuals are not subject to the Net Investment Income Tax?
Nonresident Aliens (NRAs) are not subject to the Net Investment Income Tax. If an NRA is married to a U.S. citizen or resident and has made, or is planning to make, an election under IRC section 6013(g) to be treated as a resident alien for purposes of filing as Married Filing Jointly, the proposed regulations provide these couples special rules and a corresponding IRC section 6013(g) election for the NIIT.
5. What Estates and Trusts are subject to the Net Investment Income Tax?
Estates and Trusts will be subject to the Net Investment Income Tax if they have undistributed Net Investment Income and also have adjusted gross income over the dollar amount at which the highest tax bracket for an estate or trust begins for such taxable year (for tax year 2012, this threshold amount is $11,650). There are special computational rules for certain unique types of trusts, such a Charitable Remainder Trusts and Electing Small Business Trusts, which can be found in the proposed regulations (see # 19 below).
6. What Trusts are not subject to the Net Investment Income Tax?
The following trusts are not subject to the Net Investment Income Tax:
- Trusts that are exempt from income taxes imposed by Subtitle A of the Internal Revenue Code (e.g., charitable trusts and qualified retirement plan trusts exempt from tax under IRC section 501, and Charitable Remainder Trusts exempt from tax under IRC section 664).
- A trust in which all of the unexpired interests are devoted to one or more of the purposes described in IRC section 170(c)(2)(B).
- Trusts that are classified as “grantor trusts” under IRC sections 671-679.
- Trusts that are not classified as “trusts” for federal income tax purposes (e.g., Real Estate Investment Trusts and Common Trust Funds).
What is Included in Net Investment Income
7. What is included in Net Investment Income?
In general, investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities, and businesses that are passive activities to the taxpayer (within the meaning of IRC section 469). To calculate your Net Investment Income, your investment income is reduced by certain expenses properly allocable to the income (see #12 below).
8. What are some common types of income that are not Net Investment Income?
Wages, unemployment compensation; operating income from a nonpassive business, Social Security Benefits, alimony, tax-exempt interest, self-employment income, Alaska Permanent Fund Dividends (see Rev. Rul. 90-56, 1990-2 CB 102) and distributions from certain Qualified Plans (those described in sections 401(a), 403(a), 403(b), 408, 408A, or 457(b)).
9. What kinds of gains are included in Net Investment Income?
To the extent that gains are not otherwise offset by capital losses, the following gains are common examples of items taken into account in computing Net Investment Income:
- Gains from the sale of stocks, bonds, and mutual funds.
- Capital gain distributions from mutual funds.
- Gain from the sale of investment real estate (including gain from the sale of a second home that is not a primary residence).
Gains from the sale of interests in partnerships and S corporations (to the extent you were a passive owner).
10. Does this tax apply to gain on the sale of a personal residence?
The Net Investment Income Tax will not apply to any amount of gain that is excluded from gross income for regular income tax purposes. The pre-existing statutory exclusion in IRC section 121 exempts the first $250,000 ($500,000 in the case of a married couple) of gain recognized on the sale of a principal residence from gross income for regular income tax purposes and, thus, from the NIIT.