The 3.8% Net Investment Income Tax (“NIIT”) was passed as part of the 2010 Affordable Care Act. It went into effect on January 1, 2013 and it applies to investment income only. The IRS has released extensive proposed regulations detailing the application of the NIIT. The basics are below.
Does the NIIT apply to your investment income?
The big question is: Will you have to pay the NIIT on your investment income? The tax applies when taxpayers’ modified adjusted gross income (“MAGI”) exceeds certain thresholds.
For 2013, the MAGI thresholds are $250,000 for married taxpayers who file jointly, $125,000 for married taxpayers who file separately, and $200,000 for all other filers. To find out if you are subject to the tax, you can calculate your MAGI by adding your earned income and your investment income. Deduct the appropriate threshold from this total and then compare it to your net investment income. The 3.8 percent NIIT will be due on the smaller amount.
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Taxpayers who are subject to the tax must complete Form 8960 “Net Investment Income Tax – Individuals, Estates, and Trusts” and submit it along with their tax returns. On the draft version of the form released by the IRS, individuals will compute their total investment income and then deduct applicable expenses to arrive at net investment income.
Individuals will compare their MAGI amount to the threshold based on their filing status. If the MAGI amount is higher than the threshold, they will then compare it to their total net investment income. They will pay 3.8% of the smaller amount as the NIIT.
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