Tax of Net Investment Income

By | April 13, 2014

There is a new tax on net investment income, that came into force on January 1, 2013. Tax on net investment income of 3.8 percent applies to individuals, estates and trusts that have some investment income exceeding the limit applicable amounts. This is an important new tax change that can affect many high income U.S. taxpayers.


How does the Net Investment Income Tax affect Individuals?

The tax on net investment income (NIIT) applies in the case of an individual, at a rate of 3.8 percent, over the lesser of:

  • net investment income, or
  • the excess amount of modified adjusted gross income limit for the following amounts:
    • $ 250,000 for married persons filing joint returns or qualifying widowers with dependent child
    • $ 125,000 for married individuals filing separately
    • $ 200,000 in all other cases


How does the Net Investment Income Tax affect Estates and trusts?

In the case of an estate or trust, the new 3.8 percent tax applies to the lesser of:

  • (A) Net investment income not distributed or
  • (B) exceeds the amount (if any) of:
    • adjusted gross income over the dollar amount that begins the highest tax bracket for an estate or trust for the taxable year. (For estates and trusts, the 2013 limit is $ 11.950)


Definition of net investment income and modified adjusted gross income

Generally, for purposes of this tax, investment income includes, among other things, the following:

  • interest, dividends, annuities, royalties and rents (unless resulting in a trade or business in which the NIIT not apply)
  • certain passive or trading income of a trade or business to which the tax applies net investment income, and
  • net proceeds from the sale of goods other than those belonging to a trade or business in which the NIIT not apply.

The NIIT does not apply to certain types of income that are excluded for regular tax purposes on income, such as interest on state or municipal bonds exempt from tax benefits of the Veterans Administration, or excluded income from the sale of a home principal.

The modified adjusted gross income ( MAGI ) for purposes of NIIT , defined broadly as the adjusted gross income ( AGI ) for regular tax purposes the increased by the exclusion of earned income overseas income (but also set regarding certain deductions related to earned income abroad). For taxpayers who are individuals who have not excluded any earnings from abroad, your AGI is also your regular MAGI . Overall, the net investment tax will apply to American expats living abroad at this time.


IRS Tax Forms for Net Investment Income

This new tax is calculated on Form 8960, Net Investment Income Tax-Individuals, Estates, and Trusts (tax on net investment income – individuals, estates and trusts flows).

  • Individuals declare this tax on Form 1040, U.S. Individual Income Tax Return (personal statement income taxes).
  • The estates and trusts declare this tax on Form 1041, U.S. Income Tax Return for Estates and Trusts (Declaration of income tax for estates and trusts).

For more information, see the instructions for Form 8960 and frequently asked questions about the tax on net investment income (NIIT).


Special considerations for the tax year 2013

It is possible for taxpayers to increase their tax withholding or your estimated income taxes to consider any additional tax liability associated with Net Investment Income Tax  (NIIT), in order to avoid certain penalties. This can prevent any surprises when taxes are filed in April.

The withholding calculator can be used IRS to help determine the necessary changes in retention made ​​by your employer, or visit our website estimated taxes, which contains resources to help you calculate those payments again. See Publication 505, Tax Withholding and Estimated Tax for more information on both cases from the IRS.