Starting in 2013, taxpayers may be subject to the Net Investment Income Tax (NIIT) if they have income from investments and total income in excess of certain limits in any given year. Here are the basics about the NIIT:
Overview: The law requires a tax of 3.8 percent on the lesser of either the Net Investment Income or the amount by which the Modified Adjusted Gross Income (MAGI) exceeds the NII Threshold Amount based on your filing status.
Net Investment Income (NII) defined: Total Investment Income less deductions allocable to Total Investment Income.
- Total Investment Income includes: interest, dividends, capital gains, rental income, royalty income and non-qualified annuities.
- Total Investment Income does NOT include: wages, self-employment income, unemployment compensation, Social Security benefits, alimony or any gain on the sale of your main home that you may exclude from your income.
MAGI defined: For purposes of the NIIT, MAGI is generally defined as adjusted gross income (AGI) for regular income tax purposes increased by the foreign earned income exclusion but also adjusted for certain deductions related to the foreign earned income. For individual taxpayers who have not excluded any foreign earned income, their regular AGI will also be their MAGI.
Income Threshold Amount defined for 2013:
FILING STATUS THRESHOLD
- Single or Head of household $200,000
- Married filing jointly $250,000
- Married filing separately $125,000
- Qualifying widow(er) with a child $250,000
Reporting the NIIT: Use form Form 8960, Net Investment Income Tax to calculate the tax.
Paying the NIIT: The tax is included on Form 1040. Taxpayers must be able to estimate the amount of NIIT due and increase their federal income tax withholdings or their quarterly estimated income tax payments accordingly. Having too little tax withheld or not paying enough estimated taxes, may result in a penalty for underpayment of estimated income tax .
Additional Resources from the IRS:
- Questions and Answers on the Net Investment Income Tax
- Tax Topic 559 – Net Investment Income Tax
- Publication 505, Tax Withholding and Estimated Tax
- Topic 306 – Penalty for Underpayment of Estimated Tax
- Form 8960 Instructions
If help is desired in calculating the NIIT or the amount to increase withholdings or estimated tax during the year to cover this additional tax, you may make an appointment with one of our Directors of Audit and Tax Services by reference to the CONTACTS page above. Standard rates and terms for service will apply.