Net Investment Income Tax
What is Net Investment Income Tax? Understanding the Basics for Taxpayers
Net investment income tax, or NIIT, is a tax that we may need to pay on certain investment income if our modified adjusted gross income exceeds certain thresholds.
Essentially, it’s an extra 3.8% tax that applies to the lesser of our net investment income or the amount by which our modified adjusted gross income exceeds the applicable threshold amount.
Who is Subject to NIIT?
Individuals, estates, and trusts that have investment income above certain threshold amounts may be liable for this tax. These thresholds are as follows:
- $250,000 for married filing jointly or qualifying widow(er),
- $125,000 for married filing separately,
- $200,000 for single or head of household.
What Counts as Investment Income?
Investment income can include, but is not limited to, the following:
- Interest,
- Dividends,
- Capital gains,
- Rental and royalty income,
- Non-qualified annuities,
- Income from businesses involved in trading of financial instruments or commodities.
Calculating NIIT
The calculation is straightforward. We compare our modified adjusted gross income (MAGI) to the thresholds mentioned above. If our MAGI is above the threshold, we calculate 3.8% on the lesser of our net investment income or the amount by which our MAGI exceeds the threshold.
Here’s a simple table to illustrate the tax computation for a single filer:
| Description | Amount ($) |
|---|---|
| Modified Adjusted Gross Income | 220,000 |
| Threshold for Single Filer | 200,000 |
| Amount Over Threshold | 20,000 |
| Net Investment Income | 30,000 |
| Amount Subject to NIIT (lesser of) | 20,000 |
| NIIT Rate | 3.8% |
| Total NIIT | 760 |
To stay compliant with these tax rules, we ensure our investments and income are carefully accounted for during tax season.
Remember, this is simply an overview, so for specific situations or advice, consulting with a tax professional is always recommended.