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How Are You Affected by the new Net Investment Income Tax

If you have Net Investment Income and your Adjusted Gross Income exceeds the set thresholds you may have to pay the Net Investment Income Tax.  The tax is 3.8% on the lower of your Net Investment Income or your Adjusted Gross Income that exceeds the threshold.

First, what is Net Investment Income?  

Generally it 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
  • businesses that are passive activities to the taxpayer (within the meaning of section 469)
The calculation of Net Investment Income is reduced by certain expenses properly allocable to the income.

What is Adjusted Gross Income for this tax?

Adjusted Gross Income for the purpose of the Net Investment Income Tax is the adjusted gross income (Form 1040, Line 37) adjusted for some amounts excluded from gross income under different provisions of the tax code.

Thresholds for Adjusted Gross Income for the Net Investment Income Tax:

  • Married Filing Jointly $250,000
  • Single, Head of Household (with qualifying person), Qualifying Widow(er) with dependent child $200,000
  • Married Filing Separately $125,000

The Tax

By the name of this tax you might get the idea the tax is on your Net Investment Income but the name is actually deceiving.  The 3.8% tax applies to your Net Investment Income or Your Adjusted Gross Income that exceeds the threshold.  So your tax may be on an amount smaller than your Net Investment Income.

To illustrate how the tax works, if you are single and you have $300,000 in Net Investment Income and Adjusted Gross Income of $400,000 then your Adjusted Gross Income that exceeds the threshold would be $200,000 so the tax would be applied to that $200,000 rather than to your Net Investment Income.  Therefore your Net Investment Income Tax would be $7,600.

If you have Net Investment Income but your Adjusted Gross Income is below the threshold you probably are not subject this tax.

As always what applies in your situation "depends on facts and circumstances."

There are many other aspects of the Net Investment Income Tax not covered in this article.  For more information see the IRS website

This can be a complex tax matter that I would be happy to assist you with as your CPA.  I would also be happy to discuss different strategies for this situation with you.

Jeff Haywood, CPA
The CPA Superhero
The above information is general information and is not all inclusive and as always in your tax situation everything "depends on facts and circumstances."  So call me to talk about your specific facts and circumstances.

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