Acronym: NIIT
Net investment income can be capital gains, interest, or dividends. It can include income produced by rental properties, capital gain distributions from mutual funds, and even royalty or annuity income and interest on loans you might have extended to others. It includes the income derived from a trade or business that is classified as passive income and income from business trading financial instruments or commodities. When a taxpayer sells pretty much any type of investment, they’ll realize either a gain or a loss—they’ll make money or they’ll lose money if they sell for less than what they have invested in the asset. But there are some exceptions. Tax-exempt state interest is not included in net investment income. Gains realized from the sale of a principal residence are spared when the gain is excluded from income for income tax purposes. Gains on property held in a trade or business may also be exempt.
How the Net Investment Income Tax Developed
The net investment income tax was legislated as part of the Health Care and Education Reconciliation Act of 2010, which went effect in March 2010, and was included as part of that legislation to raise revenue. The net investment tax, however, went into effect on Jan. 1, 2013. The official name of the net investment income tax is under a program known as the “Unearned Income Medicare Contribution.” This suggests that the tax revenue is used to fund Medicare, but the revenue raised by this tax actually goes into the nation’s general fund. In fact, you can be subject to the net investment income tax even if you’re exempt from the Additional Medicare tax because these two taxes apply to different types of income.
Do I Need to Pay the Net Investment Income Tax?
The net investment income tax thresholds are based on your filing status and income. You are likely subject to this tax if you have investment income and your modified adjusted gross income exceeds certain thresholds. The net investment income tax is imposed on estates and trusts, as well as individuals. For individuals, it applies to U.S. citizens and resident aliens. It does not apply to non-resident aliens unless they’ve elected to be treated as a resident of the U.S. for tax purposes so they can file joint married tax returns. The net investment income tax applies to estates and trusts when they have net investment income and have adjusted gross incomes for the year exceed the dollar amount at which the highest tax bracket begins.
How Do I Pay the Net Investment Income Tax?
File IRS Form 8960 with your tax return if you’re subject to the net investment income tax. The form comes complete with instructions to help you determine what you owe, and it should be used by both individuals and estates or trusts. Keep in mind that if you owe this tax, you will need to make quarterly estimated payments on the amount you think you’ll owe in addition to any quarterly income payments.
Calculate Your MAGI
Your IRS Form 1040 can help you calculate your net investment income tax. First, calculate your MAGI. Start with your adjusted gross income (see line 11 of your Form 1040). Then, you can use Form 8960 to calculate your MAGI for the net investment income tax. Put in your adjusted gross income, and add back the foreign earned income exclusion along with deductions applicable to the foreign earned income exclusion. You may need to make adjustments if you are involved with certain types of foreign corporations. This number is your modified adjusted gross income for net investment income tax, which may be slightly different from your MAGI for other tax calculations.
Calculate Your Net Investment Income Tax Liability
The net investment income tax is due on the lesser of your undistributed net investment income or the portion of your MAGI that exceeds the thresholds. Multiply the lower number by 0.038 (3.8%). This is the amount of net investment income tax you will pay.
