March 28, 2016

Net Investment Income Tax

The Net Investment Income Tax (NIIT) has been an unwelcome surprise for many high-income taxpayers. The Net Investment Income Tax was implemented in 2013 to assist in defraying the cost of the Affordable Care Act. Below is a brief summary of this supplemental tax as it may be relevant for tax planning purposes.

What is the Net Investment Income Tax? The NIIT tax is a supplemental 3.8% tax on certain types of investment income earned by individuals, estates, and trusts. Individuals will owe tax if they have income over the following thresholds:

Filing Status Threshold Amount
Married filing jointly $250,000
Married filing separately $125,000
Single $200,000
Head of household (with qualifying person) $200,000
Qualifying widow(er) with dependent child $250,000

 

The threshold for estates and trusts is much lower than it is for individuals. It begins to apply once income levels reach $12,300.

What is Net Investment Income?  Generally, “investment income” for NIIT purposes includes such categories of income as interest, dividends, capital gains, rental and royalty income, and business income from passive activities.  Certain expenses can offset net investment income such as investment interest expense, investment advisory and brokerage fees, expenses related to rental and royalty income, tax preparation fees, and state income taxes.

What types of income are exempt from Net Investment Income Tax?  Wages, self-employment income, unemployment compensation, Social Security Benefits, Alimony, tax exempt income, and distributions from retirement plans are generally excluded from net investment income. In addition, income from rental or active trade/business activities in which individuals materially participate can also be excluded, depending on the situation.

When you have significant income events, the NIIT can be a material component of your tax liability. Please feel free to contact us to discuss how this tax may impact your personal tax situation.