What is Net Investment Income Tax?
The Net Investment Income Tax (NIIT) is an additional 3.8% tax imposed on certain net investment income for “high-income” individuals, estates, and trusts. It was introduced as part of the Affordable Care Act (ACA) and applies to taxpayers who meet specific income thresholds. Below is a general summary of the applicability to most people. The rules can be complicated and consulting a tax professional is always best.
Generally, net investment income includes gross income from interest, dividends, annuities, royalties, and rents, unless they’re derived from the ordinary course of a trade or business that isn’t (a) a passive activity, or (b) a trade or business of trading in financial instruments or commodities.
Net investment income does not include income earned from self-employment activities subject to self-employment tax, W2 wages, interest that is tax-exempt, non-resident alien income, distributions from qualified retirement plan and income from a trade or business in which you actively participate.
Individuals who have for the tax year
(a) MAGI that’s over an applicable threshold amount, and
(b) net investment income, must pay 3.8% of the smaller of (a) or (b) as their NIIT.
The applicable threshold amount is based on your filing status.
· Married Filing Jointly or Qualifying Surviving Spouse is $250,000.
· Married Filing Separately is $125,000.
· Single or Head of Household is $200,000.
The NIIT applies to estates and trusts that have undistributed net investment income and adjusted gross income (AGI) in excess of the threshold amount. The NIIT is 3.8% of the lesser of:
· The undistributed net investment income for the tax year; or
· The excess, if any, of AGI (as defined in section 67(e)) over the applicable threshold amount.
The applicable threshold amount is the dollar amount at which the highest tax bracket in section 1(e) begins for the tax year.
Plan Ahead: Consider tax-efficient strategies such as:
Increasing retirement contributions (reduces MAGI).
Using tax-exempt investments like municipal bonds.
Timing income recognition to stay below thresholds.
