Am I Subject to the Net Investment Income tax?

subject to the net investment income taxEffective January 1, 2013, the Net Investment Income Tax (NIIT) imposes a 3.8% tax on certain net investment income of individuals, estates, and trusts that are above statuary threshold amounts. This statement may leave you wondering, “Am I subject to the Net Investment Income Tax?

As with any tax law, there are pages of rules, exceptions, and loopholes, so consult your tax accountant for more information.

However, in order to be subject to this tax, you must:

1. Have Net Investment Income
2. Have modified adjusted gross income above the following thresholds

  • Married filing jointly – $250,000
  • Married filing separately – $125,000
  • Single – $200,000
  • Head of Household – $200,000
  • Qualifying widow with dependent child – $250,000

The taxable income under this new law includes the following investments:

  • Interest
  • Dividends
  • Capital gains
  • Rental and royalty income
  • Non-qualified annuities

The capital gains that are subject to taxation under this law are gains from the sale of stocks, bonds, and mutual funds, as well as the capital gain distributions from mutual funds, gain from the sale of investment real estate, and gains from the sale of an individual’s share in a partnership or S corporation. These gains are taxable only to the extent that these gains are not offset by capital losses. In addition, the sale of a primary residence is not taxed under the Net Investment Income Tax if it is also excluded from gross income for regular tax purposes.

Non-resident aliens are not generally subject to this tax unless they meet certain specific criteria. Dual-resident individuals are not subject to the NIIT either if they determine that they are residents of a foreign country for tax purposes. A dual-status individual who is a resident of the United States for part of the year and a resident of a foreign country the remainder of the year is only subject the the NIIT for the portion of the year that person is a United States resident.

If you are still wondering, “Am I subject to the Net Investment Income tax?” talk to someone who specializes in tax law.