What is Net Investment Income Tax
Net Investment Income Tax, often referred to as NIIT is, and does, exactly what the title suggests, it imposes an additional 3.8% tax on income from investments.
For the purposes of NIIT, investments are defined as any interest, dividends, capital gains and any rental / royalty income. It does not include any wages, social security benefits or self-employment income. *Please note that this is not a full in-depth list and so does not include everything, you should refer to the IRS legislation for a more exhaustive list.
However, before the 3.8% tax rate is applied to your investment income it is worth noting that you can make various deductions to the investment income thereby reducing the amount which is eventually charged to tax. These deductions can only be expenses that are linked to that income and so generally include brokerage fees, investment advisory fees and investment interest expenses.
Depending on your filing status you will only be subject to NIIT when your modified adjusted gross income (MAGI) exceeds the separate thresholds which are as follows
– Married filing jointly $250,000
– Married filing separately $125,000
– Single and Head of household $200,000
Adjusted Gross Income (AGI) – the total of all your taxable income less allowable deductions.
Modified adjusted gross income (MAGI) – is your AGI with certain add backs most notably excluded foreign income and IRA deductions.
If you do go over this threshold it is not the entire amount that is subject to 3.8%. The amount subject to tax is the lower of the following two:
– The amount by which your MAGI exceeds the threshold or
– The total net investment income
For example, let’s say your filing status is married filing jointly and you have earnings totaling $230,000 and then investment income of $30,000. You would be $10,000 over the limit but your investment income is $30,000. Therefore, the NIIT will be based on the lower of the two which in this case is the amount by which you are over your MAGI, $10,000.
Foreign tax credits are not available to offset the US tax liability arising from Net Investment Income Tax.
This article is only an outline of the various NIIT principles. As with all areas of US tax there are always further complications based on facts and circumstances. Please contact us directly for more information.