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Tax Blog

Net Investment Income Tax -- Part One: What is it?

The Net Investment Income Tax (NIIT) effects most taxpayers; however, it has a more substantial impact on business owners and investors. Under the Internal Revenue Code (IRC) Section 1411, the NIIT was created and placed into effect on January 1, 2013. The NIIT is applied at a rate of 3.8% to certain net investment income of an individual and for trusts and estates that have income above the statutory thresholds. These thresholds, unlike most, are NOT annually adjusted for inflation.

Having Been put into effect in 2013, the NIIT affects income tax returns of individuals, estates and trusts, beginning with their first tax year beginning on (or after) Jan. 1, 2013.

The statutory thresholds are set at the following amounts based on the filing status of the taxpayer(s).

Filing Status Threshold Amount

Married filing jointly $250,000

Married filing separately $125,000

Single $200,000

Head of household (with qualifying person) $200,000

Qualifying widow(er) with dependent child $250,000

You may be wondering, “What is included in ‘Investment Income’?” In general, investment income includes, but is not limited to:

  • interest,

  • dividends,

  • capital gains,

  • Gains from the sale of stocks, bonds, and mutual funds.

  • Capital gain distributions from mutual funds.

  • Gain from the sale of investment real estate (including gain from the sale of a second home that is not a primary residence).

  • Gains from the sale of interests in partnerships and S corporations (to the extent the partner or shareholder was a passive owner).

  • rental and royalty income,

  • non-qualified annuities,

  • income from businesses involved in trading of financial instruments or commodities and

businesses that are passive activities to the taxpayer (within the meaning of US Code section 469[1]).

[1] The term “passive activity” shall not include any working interest in any oil or gas property which the taxpayer holds directly or through an entity which does not limit the liability of the taxpayer with respect to such interest. (B) Income in subsequent years. 26 US Code section 469.

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