What Is A Type Of Income Investment & How Does It Work?

A Type Of Income Investment refers to assets purchased to generate a steady stream of income, such as dividends, interest, or rental payments, offering potential revenue streams for individuals and businesses alike, and Income-Partners.net can help you identify opportunities and connect with strategic partners. These investments serve as tools for revenue generation and can be an important component of your financial plan. With insight from research, and access to potential partnerships on income-partners.net, you can expand your financial prospects.

1. What Is the Net Investment Income Tax (NIIT)?

The Net Investment Income Tax (NIIT) is a 3.8% tax on certain net investment income of individuals, estates, and trusts that exceed specific statutory threshold amounts. It’s essential to understand this tax to accurately assess your investment returns. Knowing the NIIT implications on your investment gains will allow you to plan your investments.

The NIIT, implemented under Section 1411 of the Internal Revenue Code, targets investment income for those whose earnings surpass a set level. This tax impacts various forms of investment income, including dividends, capital gains, rental and royalty income, and interest. The tax is applied to the lesser of the taxpayer’s net investment income or the amount by which the taxpayer’s modified adjusted gross income (MAGI) exceeds a threshold.

Understanding the NIIT Thresholds:

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

Taxpayers need to be aware that these threshold amounts are not adjusted for inflation, potentially affecting more individuals over time.

NIIT and Medicare Taxes:

Even those exempt from Medicare taxes might still be subject to the NIIT if their net investment income and modified adjusted gross income exceed the applicable thresholds.

Modified Adjusted Gross Income (MAGI):

MAGI, for NIIT purposes, is the adjusted gross income (AGI) with specific adjustments. This includes increasing AGI by the difference between amounts excluded from gross income under section 911(a)(1) and the amount of any deductions or exclusions disallowed under section 911(d)(6) for amounts described in section 911(a)(1). Taxpayers with income from controlled foreign corporations (CFCs) and passive foreign investment companies (PFICs) may have additional adjustments to their AGI.

Understanding how the NIIT functions and how it is calculated is crucial for investors, so they are able to effectively plan, make informed decisions, and minimize tax liabilities. Staying informed on the latest tax rules and regulations is an important step to being a savvy investor.

2. When Did the Net Investment Income Tax Take Effect?

The Net Investment Income Tax (NIIT) took effect on January 1, 2013, impacting income tax returns for individuals, estates, and trusts starting with the tax year 2013. You should be aware that the NIIT has been in effect for over a decade, and understanding its implications is crucial for effective financial planning and investment decisions. Investors have had to comply with the NIIT in the past and will need to do so in the future.

The introduction of the NIIT was part of a broader effort to fund the Affordable Care Act (ACA). By taxing certain investment income above established income thresholds, the government aimed to generate revenue to support healthcare initiatives. The NIIT has become a permanent part of the U.S. tax code.

Impact on Tax Returns:

• Individuals: The NIIT affects individual taxpayers whose modified adjusted gross income (MAGI) exceeds certain thresholds.
• Estates and Trusts: Estates and trusts with undistributed net investment income and adjusted gross income above a specific threshold are also subject to the NIIT.

The NIIT does not retroactively affect income tax returns for the 2012 taxable year filed in 2013. Financial planning and investment strategies should account for the NIIT to minimize tax liabilities and optimize investment returns.

3. Which Individuals Are Subject to the Net Investment Income Tax?

Individuals are subject to the Net Investment Income Tax (NIIT) if they have net investment income and their modified adjusted gross income (MAGI) exceeds certain threshold amounts. Understanding these thresholds is vital for determining whether you owe this tax. By having the correct information, you can take the steps to managing your tax liabilities.

Individuals will owe the tax if they have Net Investment Income and also have modified adjusted gross income over the following thresholds:

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

Taxpayers should note that these threshold amounts are not indexed for inflation.

Even if you are exempt from Medicare taxes, you still may be subject to the Net Investment Income Tax if you have Net Investment Income and also have modified adjusted gross income over the applicable thresholds.

Key Considerations:

• Net Investment Income: Includes interest, dividends, capital gains, rental and royalty income, and income from passive activities.
• Modified Adjusted Gross Income (MAGI): Adjusted gross income increased by certain items, such as excluded foreign earned income.
• Filing Status: Your filing status significantly impacts the threshold amount.
• Inflation: Be aware that the thresholds are not adjusted for inflation, so more people may be subject to the tax over time.

4. What Is Modified Adjusted Gross Income (MAGI) for the Net Investment Income Tax?

For the Net Investment Income Tax (NIIT), modified adjusted gross income (MAGI) is adjusted gross income (AGI) increased by specific items. Knowing how to calculate your MAGI is essential for determining whether you are subject to the NIIT. Ensuring that you get the right number is important.

Modified adjusted gross income is calculated as adjusted gross income (Form 1040, Line 37) increased by the difference between amounts excluded from gross income under section 911(a)(1) and the amount of any deductions (taken into account in computing adjusted gross income) or exclusions disallowed under section 911(d)(6) for amounts described in section 911(a)(1). In the case of taxpayers with income from controlled foreign corporations (CFCs) and passive foreign investment companies (PFICs), they may have additional adjustments to their AGI.

Key Components of MAGI Calculation:

1. Adjusted Gross Income (AGI): This is your gross income less certain deductions, such as contributions to traditional IRAs, student loan interest, and alimony payments.
2. Section 911(a)(1) Exclusion: This refers to income excluded from gross income for U.S. citizens or residents living abroad.
3. Section 911(d)(6) Disallowance: This involves any deductions or exclusions disallowed due to foreign earned income or housing costs.
4. Income from CFCs and PFICs: Taxpayers with income from controlled foreign corporations and passive foreign investment companies may have additional adjustments to their AGI.

Example:

Suppose an individual has an AGI of $150,000. They also excluded $50,000 in foreign earned income under section 911(a)(1) and had $10,000 in disallowed deductions under section 911(d)(6). Their MAGI would be:

$150,000 (AGI) + ($50,000 – $10,000) = $190,000

In this case, the individual’s MAGI for NIIT purposes is $190,000.

5. What Individuals Are Not Subject to the Net Investment Income Tax?

Nonresident Aliens (NRAs) are not subject to the Net Investment Income Tax. If an NRA is married to a U.S. citizen or resident and has made, or is planning to make, an election under section 6013(g) or 6013(h) to be treated as a resident alien for purposes of filing as Married Filing Jointly, the final regulations provide these couples special rules and a corresponding section 6013(g)/(h) election for the NIIT. There are specific exceptions and conditions for individuals not subject to the NIIT.

A dual-resident individual, within the meaning of regulation §301.7701(b)-7(a)(1), who determines that he or she is a resident of a foreign country for tax purposes pursuant to an income tax treaty between the United States and that foreign country and claims benefits of the treaty as a nonresident of the United States is considered a NRA for purposes of the NIIT.

A dual-status individual, who is a resident of the United States for part of the year and a NRA for the other part of the year, is subject to the NIIT only with respect to the portion of the year during which the individual is a United States resident. The threshold amount (described in # 3 above) is not reduced or prorated for a dual-status resident.

Key Exemptions and Considerations:

• Nonresident Aliens (NRAs): Generally, NRAs are exempt from the NIIT.
• Dual-Resident Individuals: Those who are residents of both the U.S. and a foreign country under a tax treaty and claim treaty benefits as a nonresident of the U.S. are considered NRAs for NIIT purposes.
• Dual-Status Individuals: Individuals who are U.S. residents for part of the year and NRAs for the remainder are subject to the NIIT only for the portion of the year they are U.S. residents.

6. What Estates and Trusts Are Subject to the Net Investment Income Tax?

Estates and trusts are subject to the Net Investment Income Tax if they have undistributed Net Investment Income and also have adjusted gross income over the dollar amount at which the highest tax bracket for an estate or trust begins for such taxable year under section 1(e) (for tax year 2013, this threshold amount is $11,950). Knowing these thresholds and rules can help you manage trust and estate finances efficiently. When you have an efficient plan in place it will help you stay on track.

Generally, the threshold amount for the upcoming year is updated by IRS each fall in a revenue procedure. For 2014, the threshold amount is $12,150.

There are special computational rules for certain unique types of trusts, such as Qualified Funeral Trusts, Charitable Remainder Trusts and Electing Small Business Trusts, which can be found in the final regulations.

Key Points:

• Undistributed Net Investment Income: Income that the estate or trust has not distributed to beneficiaries.
• Adjusted Gross Income (AGI): The estate or trust’s AGI must exceed the threshold for the highest tax bracket.
• Threshold Amount: This amount is updated annually by the IRS.
• Special Trusts: Unique types of trusts like Qualified Funeral Trusts, Charitable Remainder Trusts, and Electing Small Business Trusts have specific rules.

7. What Estates and Trusts Are Not Subject to the Net Investment Income Tax?

Certain estates and trusts are exempt from the Net Investment Income Tax (NIIT). Understanding these exemptions can help you determine if your trust or estate qualifies. If you qualify for the exemption this will allow you to plan better.

The following trusts are not subject to the Net Investment Income Tax:

1. Trusts that are exempt from income taxes imposed by Subtitle A of the Internal Revenue Code (e.g., charitable trusts and qualified retirement plan trusts exempt from tax under section 501, and Charitable Remainder Trusts exempt from tax under section 664).
2. A trust or decedent’s estate in which all of the unexpired interests are devoted to one or more of the purposes described in section 170(c)(2)(B).
3. Trusts that are classified as “grantor trusts” under sections 671-679.
4. Trusts that are not classified as “trusts” for federal income tax purposes (e.g., Real Estate Investment Trusts and Common Trust Funds).
5. Electing Alaska Native Settlement Trusts.
6. Perpetual Care (Cemetery) Trusts.

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Categories of Exempt Trusts and Estates:

• Tax-Exempt Trusts: Trusts exempt from income taxes under Subtitle A of the Internal Revenue Code, such as charitable trusts and qualified retirement plan trusts.
• Charitable Purpose Trusts: Trusts or decedent’s estates with unexpired interests devoted to charitable purposes described in section 170(c)(2)(B).
• Grantor Trusts: Trusts classified as “grantor trusts” under sections 671-679.
• Non-Trust Entities: Entities not classified as “trusts” for federal income tax purposes, such as Real Estate Investment Trusts (REITs) and Common Trust Funds.
• Specific Trusts: Electing Alaska Native Settlement Trusts and Perpetual Care (Cemetery) Trusts.

8. What Is Included in Net Investment Income?

Net Investment Income (NII) includes various forms of investment earnings, such as interest, dividends, capital gains, rental and royalty income, and income from businesses involved in trading financial instruments or commodities. Understanding these components is vital for accurately calculating your NIIT liability. When you have an idea what your NIIT Liability will be, you will be able to plan better.

In general, investment income includes, but is not limited to: interest, dividends, capital gains, 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 section 469). To calculate your Net Investment Income, your investment income is reduced by certain expenses properly allocable to the income.

Key Components of Net Investment Income:

• Interest: Income received from savings accounts, bonds, and other interest-bearing investments.
• Dividends: Payments from stocks, mutual funds, and other investments.
• Capital Gains: Profits from the sale of stocks, bonds, real estate, and other capital assets.
• Rental and Royalty Income: Income from renting out properties or licensing intellectual property.
• Income from Trading Businesses: Income from businesses involved in trading financial instruments or commodities.
• Passive Activities: Income from businesses in which the taxpayer does not actively participate.

Net Investment Income is reduced by certain expenses properly allocable to the income. These expenses can include investment interest expense, investment advisory fees, and expenses related to rental and royalty income.

9. What Types of Income Are Not Net Investment Income?

Several types of income are excluded from Net Investment Income (NII), such as wages, unemployment compensation, Social Security benefits, and tax-exempt interest. Knowing these exclusions is essential for accurately determining your NIIT liability. Understanding what is not included will help you with financial planning.

Wages, unemployment compensation; operating income from a nonpassive business, Social Security Benefits, alimony, tax-exempt interest, self-employment income, Alaska Permanent Fund Dividends and distributions from certain Qualified Plans (those described in sections 401(a), 403(a), 403(b), 408, 408A or 457(b)).

Income Exclusions from Net Investment Income:

• Wages: Income earned as an employee.
• Unemployment Compensation: Benefits received while unemployed.
• Operating Income from a Nonpassive Business: Income from a business in which the taxpayer actively participates.
• Social Security Benefits: Payments received from the Social Security Administration.
• Alimony: Payments received as alimony.
• Tax-Exempt Interest: Interest income that is exempt from federal income tax.
• Self-Employment Income: Income earned from self-employment.
• Alaska Permanent Fund Dividends: Dividends paid to Alaska residents from the state’s Permanent Fund.
• Distributions from Qualified Plans: Distributions from certain qualified retirement plans, such as 401(a), 403(a), 403(b), 408, 408A, or 457(b) plans.

10. What Kinds of Gains Are Included in Net Investment Income?

Gains included in Net Investment Income (NII) typically involve profits from the sale of stocks, bonds, mutual funds, investment real estate, and interests in partnerships and S corporations where the owner is a passive participant. Understanding which gains are included helps in accurately calculating your NIIT liability. The more accurate your numbers are, the easier it will be to estimate your expenses.

To the extent that gains are not otherwise offset by capital losses, the following gains are common examples of items taken into account in computing Net Investment Income:

1. Gains from the sale of stocks, bonds, and mutual funds.
2. Capital gain distributions from mutual funds.
3. Gain from the sale of investment real estate (including gain from the sale of a second home that is not a primary residence).
4. Gains from the sale of interests in partnerships and S corporations (to the extent the partner or shareholder was a passive owner).

Types of Gains Included in Net Investment Income:

• Gains from Stocks, Bonds, and Mutual Funds: Profits from selling these investments.
• Capital Gain Distributions from Mutual Funds: Distributions specifically identified as capital gains.
• Gains from Investment Real Estate: Profits from selling investment properties, including second homes.
• Gains from Partnerships and S Corporations: Profits from the sale of interests in these entities, particularly for passive owners.

11. Does The NIIT Apply to Gain on the Sale of a Personal Residence?

The Net Investment Income Tax (NIIT) generally does not apply to any amount of gain that is excluded from gross income for regular income tax purposes, such as the gain from the sale of a personal residence up to $250,000 for single filers and $500,000 for married couples. You are not required to pay taxes on the sale of the residence.

The pre-existing statutory exclusion in section 121 exempts the first $250,000 ($500,000 in the case of a married couple) of gain recognized on the sale of a principal residence from gross income for regular income tax purposes and, thus, from the NIIT.

Example 1: A, a single filer, earns $210,000 in wages and sells his principal residence that he has owned and resided in for the last 10 years for $420,000. A’s cost basis in the home is $200,000. A’s realized gain on the sale is $220,000. Under section 121, A may exclude up to $250,000 of gain on the sale. Because this gain is excluded for regular income tax purposes, it is also excluded for purposes of determining Net Investment Income. In this example, the Net Investment Income Tax does not apply to the gain from the sale of A’s home.

Example 2: B and C, a married couple filing jointly, sell their principal residence that they have owned and resided in for the last 10 years for $1.3 million. B and C’s cost basis in the home is $700,000. B and C’s realized gain on the sale is $600,000. The recognized gain subject to regular income taxes is $100,000 ($600,000 realized gain less the $500,000 section 121 exclusion). B and C have $125,000 of other Net Investment Income, which brings B and C’s total Net Investment Income to $225,000. B and C’s modified adjusted gross income is $300,000 and exceeds the threshold amount of $250,000 by $50,000. B and C are subject to NIIT on the lesser of $225,000 (B’s Net Investment Income) or $50,000 (the amount B and C’s modified adjusted gross income exceeds the $250,000 married filing jointly threshold). B and C owe Net Investment Income Tax of $1,900 ($50,000 X 3.8%).

Example 3: D, a single filer, earns $45,000 in wages and sells her principal residence that she has owned and resided in for the last 10 years for $1 million. D’s cost basis in the home is $600,000. D’s realized gain on the sale is $400,000. The recognized gain subject to regular income taxes is $150,000 ($400,000 realized gain less the $250,000 section 121 exclusion), which is also Net Investment Income. D’s modified adjusted gross income is $195,000. Since D’s modified adjusted gross income is below the threshold amount of $200,000, D does not owe any Net Investment Income Tax.

Key Takeaways:

• Section 121 Exclusion: The first $250,000 (single) or $500,000 (married filing jointly) of gain from the sale of a principal residence is excluded from gross income.
• NIIT Exemption: The NIIT does not apply to any gain excluded from gross income under Section 121.
• Modified Adjusted Gross Income (MAGI): If your MAGI exceeds the threshold and you have remaining gain after the Section 121 exclusion, the NIIT may apply.

12. Does Net Investment Income Include Interest, Dividends, and Capital Gains of My Children That I Report on My Form 1040 Using Form 8814?

Yes, the amounts of Net Investment Income (NII) included on your Form 1040 due to Form 8814 are included in calculating your Net Investment Income. Knowing this ensures accurate calculation of your NIIT liability. Being exact on tax forms is an important step.

The amounts of Net Investment Income that are included on your Form 1040 by reason of Form 8814 are included in calculating your Net Investment Income. However, the calculation of your Net Investment Income does not include (a) amounts excluded from your Form 1040 due to the threshold amounts on Form 8814 and (b) amounts attributable to Alaska Permanent Fund Dividends.

Key Points:

• Form 8814: This form is used to report a child’s interest and dividends on the parent’s return.
• Inclusion in NII: If you report your child’s investment income on your Form 1040 using Form 8814, those amounts are included in your Net Investment Income calculation.
• Exclusions: Amounts excluded from your Form 1040 due to threshold amounts on Form 8814 and amounts attributable to Alaska Permanent Fund Dividends are not included in your NII calculation.

13. What Investment Expenses Are Deductible in Computing NII?

To arrive at Net Investment Income (NII), gross investment income is reduced by deductions properly allocable to items of gross investment income. Knowing which expenses are deductible is essential for minimizing your NIIT liability. When you know which expenses can be deducted, your NIIT Liability will be lower.

In order to arrive at Net Investment Income, Gross Investment Income is reduced by deductions that are properly allocable to items of Gross Investment Income. Examples of deductions, a portion of which may be properly allocable to Gross Investment Income, include investment interest expense, investment advisory and brokerage fees, expenses related to rental and royalty income, tax preparation fees, fiduciary expenses (in the case of an estate or trust) and state and local income taxes.

Examples of Deductible Investment Expenses:

• Investment Interest Expense: Interest paid on money borrowed to purchase investments.
• Investment Advisory and Brokerage Fees: Fees paid for investment advice and brokerage services.
• Expenses Related to Rental and Royalty Income: Expenses such as repairs, maintenance, and depreciation for rental properties.
• Tax Preparation Fees: Fees paid for tax preparation services, to the extent they are allocable to investment income.
• Fiduciary Expenses: Expenses incurred by an estate or trust in managing investments.
• State and Local Income Taxes: State and local income taxes, to the extent they are allocable to investment income.

14. Will I Have to Pay Both the 3.8% Net Investment Income Tax and the Additional .9% Medicare Tax?

You may be subject to both the 3.8% Net Investment Income Tax (NIIT) and the additional 0.9% Medicare Tax, but not on the same type of income. Understanding how these taxes interact is essential for accurate tax planning.

The 0.9% Additional Medicare Tax applies to individuals’ wages, compensation and self-employment income over certain thresholds, but it does not apply to income items included in Net Investment Income.

Key Points:

• Net Investment Income Tax (NIIT): Applies to investment income, such as interest, dividends, capital gains, rental and royalty income, and income from passive activities.
• Additional Medicare Tax: Applies to wages, compensation, and self-employment income above certain thresholds.

Differences Between the Taxes:

Feature	Net Investment Income Tax (NIIT)	Additional Medicare Tax
Tax Rate	3.8%	0.9%
Income Type	Investment Income	Wages, Compensation, Self-Employment Income
Applicability	Individuals, Estates, Trusts	Individuals

15. If I Am Subject to the Net Investment Income Tax, How Will I Report and Pay the Tax?

If you are subject to the Net Investment Income Tax (NIIT), you will report and pay the tax using Form 8960 and the corresponding instructions. Understanding this process is essential for compliance. Here’s the correct way to report and pay your taxes.

Individuals, estates, and trusts will use Form 8960 and instructions to compute their Net Investment Income Tax.

For individuals, the tax will be reported on, and paid with, the Form 1040. For estates and trusts, the tax will be reported on, and paid with, the Form 1041.

Reporting and Payment Process:

1. Form 8960: This form is used to calculate the Net Investment Income Tax. It requires detailed information about your investment income and applicable deductions.
2. Form 1040 (Individuals): Individuals report the NIIT on Form 1040, which is the standard form for filing individual income tax returns.
3. Form 1041 (Estates and Trusts): Estates and trusts report the NIIT on Form 1041, which is used for filing income tax returns for estates and trusts.

16. Is the Net Investment Income Tax Subject to Estimated Tax Provisions?

Yes, the Net Investment Income Tax (NIIT) is subject to estimated tax provisions. Understanding this requirement is essential to avoid underpayment penalties. Make sure you pay your taxes so you will not get penalized.

The Net Investment Income Tax is subject to the estimated tax provisions. Individuals, estates and trusts that expect to be subject to the tax in 2013 or thereafter should adjust their income tax withholding or estimated payments to account for the tax increase in order to avoid underpayment penalties. For more information on tax withholding and estimated tax, see Publication 505, Tax withholding and Estimated Tax.

Key Points:

• Estimated Tax: This refers to paying taxes throughout the year, rather than in a lump sum at the end of the tax year.
• Adjusting Withholding or Payments: If you expect to owe NIIT, you should increase your income tax withholding or make estimated tax payments to cover the tax liability.
• Underpayment Penalties: Failing to pay enough tax throughout the year can result in penalties.

17. Can Tax Credits Reduce My NIIT Liability?

Any federal income tax credit that may be used to offset a tax liability imposed by subtitle A of the Code may be used to offset the NII. However, if the tax credit is allowed only against the tax imposed by chapter 1 of the Code (regular income tax), those credits may not reduce the NIIT. Understanding which credits can reduce your NIIT liability is essential for minimizing your tax burden.

For example, foreign income tax credits (sections 27(a) and 901(a)) and the general business credit (section 38) are allowed as credits only against the tax imposed by chapter 1 of the Code, and therefore may not be used to reduce your NIIT liability. If you take foreign income taxes as an income tax deduction (versus a tax credit), some (or all) of the deduction amount may deducted against NII.

Key Considerations:

• Credits Under Subtitle A: Federal income tax credits that offset tax liabilities under Subtitle A of the Internal Revenue Code can be used to reduce NIIT.
• Chapter 1 Credits: Tax credits allowed only against the tax imposed by Chapter 1 of the Code (regular income tax) cannot reduce NIIT.
• Foreign Income Taxes: If you take foreign income taxes as a deduction instead of a credit, some or all of the deduction amount may be deducted against NII.

18. Does The Tax Have To Be Withheld From Wages?

No, the Net Investment Income Tax (NIIT) does not have to be withheld from wages. Knowing this can help you plan your tax payments accordingly. If you choose to pay the extra taxes throughout the year, you can request for additional income tax to be withheld from your wages.

No, but you may request that additional income tax be withheld from your wages.

Key Points:

• No Mandatory Withholding: Employers are not required to withhold NIIT from your wages.
• Voluntary Withholding: You can request that additional income tax be withheld from your wages to cover your NIIT liability.

19. Single Taxpayer With Income Less Than the Statutory Threshold.

This example illustrates how the Net Investment Income Tax (NIIT) does not apply to a single taxpayer whose income is below the statutory threshold. Use the following example to determine how to plan your taxes.

Taxpayer, a single filer, has wages of $180,000 and $15,000 of dividends and capital gains. Taxpayer’s modified adjusted gross income is $195,000, which is less than the $200,000 statutory threshold. Taxpayer is not subject to the Net Investment Income Tax.

Example Details:

• Filing Status: Single
• Wages: $180,000
• Dividends and Capital Gains: $15,000
• Modified Adjusted Gross Income (MAGI): $195,000

Conclusion:

Since the taxpayer’s MAGI ($195,000) is less than the $200,000 threshold for single filers, they are not subject to the NIIT.

20. Single Taxpayer With Income Greater Than the Statutory Threshold.

This example illustrates how the Net Investment Income Tax (NIIT) applies to a single taxpayer whose income exceeds the statutory threshold. Understanding such examples helps you to correctly calculate your NIIT liability.

Taxpayer, a single filer, has $180,000 of wages. Taxpayer also received $90,000 from a passive partnership interest, which is considered Net Investment Income. Taxpayer’s modified adjusted gross income is $270,000.

Taxpayer’s modified adjusted gross income exceeds the threshold of $200,000 for single taxpayers by $70,000. Taxpayer’s Net Investment Income is $90,000.

The Net Investment Income Tax is based on the lesser of $70,000 (the amount that Taxpayer’s modified adjusted gross income exceeds the $200,000 threshold) or $90,000 (Taxpayer’s Net Investment Income). Taxpayer owes NIIT of $2,660 ($70,000 x 3.8%).

Example Details:

• Filing Status: Single
• Wages: $180,000
• Income from Passive Partnership Interest (Net Investment Income): $90,000
• Modified Adjusted Gross Income (MAGI): $270,000

NIIT Calculation:

1. Excess MAGI: $270,000 (MAGI) – $200,000 (Threshold) = $70,000
2. Net Investment Income: $90,000
3. Taxable Amount: The lesser of $70,000 (Excess MAGI) or $90,000 (Net Investment Income) = $70,000
4. NIIT: $70,000 x 3.8% = $2,660

Conclusion:

The taxpayer owes Net Investment Income Tax of $2,660.

21. Is There Additional Information Available About the Net Investment Income Tax Besides These FAQs?

Yes, additional information about the Net Investment Income Tax (NIIT) is available beyond these FAQs. There are always new rulings being made and updated information.

You can find additional information about the NIIT in the 2013 final regulations and in a new 2013 proposed regulation published.

Resources for Additional Information:

• IRS Publications: The Internal Revenue Service (IRS) provides various publications and guidance on the NIIT.
• Final Regulations: The final regulations offer detailed rules and interpretations of the NIIT.
• Proposed Regulations: Proposed regulations can provide insight into potential future changes to the NIIT.
• **Tax