Net Investment Income Tax (NIIT) is a surtax imposed on certain investment income in the United States. It was introduced as part of the Affordable Care Act (ACA) in 2013 and is aimed at high-income individuals and households. The tax is calculated based on a specific percentage of a taxpayer's net investment income, which includes income from various sources such as interest, dividends, capital gains, rental income, and passive business activities.
The NIIT is designed to help fund the healthcare reforms under the ACA by targeting individuals with higher investment income. The tax applies to taxpayers whose modified adjusted gross income (MAGI) exceeds certain threshold amounts, which depend on the taxpayer's filing status.
For individuals, the threshold amounts are as follows:
- Single filers and married individuals filing separately: $200,000 MAGI
- Married individuals filing jointly and qualifying widows/widowers: $250,000 MAGI
- Head of household: $200,000 MAGI
For trusts and estates, the threshold amount is $12,150 for the 2021 tax year. It is adjusted annually for inflation.
The NIIT rate is set at 3.8% of the lesser of either a taxpayer's net investment income or the amount by which their MAGI exceeds the applicable threshold. This means that the tax is calculated on the smaller of the two amounts.
Net investment income generally includes:
- Interest, dividends, and annuities: This includes taxable interest, dividends from stocks and mutual funds, and annuity payments.
- Capital gains: This includes gains from the sale of stocks, bonds, real estate, and other capital assets.
- Rental and royalty income: This includes income from rental properties, royalties from intellectual property, and income from passive activities.
- Non-business partnerships and S corporation income: This includes income from partnerships and S corporations in which the taxpayer is a passive investor.
- Passive business activities: This includes income from businesses in which the taxpayer does not materially participate.
However, there are certain types of income that are not considered net investment income and are exempt from the NIIT. These include:
- Wages, self-employment income, and active business income
- Distributions from qualified retirement plans, such as 401(k) plans and IRAs
- Social Security benefits
- Tax-exempt interest
To calculate the NIIT liability, taxpayers must complete Form 8960, Net Investment Income Tax—Individuals, Estates, and Trusts, and attach it to their annual tax return (Form 1040). The form helps determine the net investment income, applicable threshold, and the tax owed.
It's important to note that the NIIT is separate from the regular income tax and is an additional tax liability for taxpayers who meet the income thresholds. Proper planning and consultation with a tax professional are recommended for individuals who may be subject to the NIIT to understand its implications and explore potential strategies for managing the tax burden.
In summary, the Net Investment Income Tax is a 3.8% surtax on certain investment income for high-income individuals and households. It applies to net investment income exceeding specific thresholds and helps fund healthcare reforms under the ACA. Proper understanding and planning are essential for individuals subject to this tax.