16 Jun 2014 The Net Investment Income Tax
Beginning in tax year 2013, a new “net investment income tax” (NIIT) of 3.8% applies to a taxpayer’s “net investment income” (on top of existing taxes on capital gains) when the taxpayer’s income is above the threshold amount ($200,000 for single taxpayers and heads of household and $250,000 for married individuals filing jointly).
The threshold amount is determined by adding together all income, taxable or not. If the taxpayer’s total income does not meet the threshold amount, the NIIT does not apply. If total income does exceed the threshold amount then the NIIT applies to the excess income, but is capped at total net investment income. Net investment income is generally any gains from selling stocks and bonds, investment real estate, and some partnership and S corporation interests. Net investment income does not include wages, unemployment compensation, social security benefits, self-employment income, 401(k) plans, IRAs, and nonpassive business activities. The IRS defines nonpassive activities as those in which the taxpayer doesn’t “materially participate.” Working more than 500 hours in the course of a year for your business constitutes material participation.
For a single taxpayer, the relevant NIIT threshold is $200,000. If the taxpayer’s income consists of wages of $100,000 and net investment income of $50,000, the total income is $150,000. This is below the $200,000 threshold, and the NIIT does not apply. If wages are $225,000 and there is net investment income of $50,000, total income would be $275,000, which exceeds the $200,000 threshold. The NIIT would then be calculated as follows:
Total income ($275,000) minus threshold amount ($200,000) = $75,000. The $75,000 is then capped at net investment income, being $50,000.
$50,000 x 3.8% NIIT rate = $1,900 NIITDisclaimer: This blog and website are public sources of general information concerning our firm and its lawyers, as well as the information presented. They are intended, but not promised or guaranteed, to be correct, complete, and up-to-date as of the date posted. This blog and website are not intended to be, and are not, sources of legal opinion or advice. The materials, information, and communications on this blog and website do not apply to any particular person, entity, or situation, and do not apply to you or to your specific situation. You will need to consult with an attorney and/or other appropriate professional about your specific situation. Thank you.