Avoiding The Net Investment Income Tax

The Patient Protection and Affordable Care Act not only brought us Obamacare, but also the web Investment Income Tax or NIIT. This new tax, which really is a Medicare surtax, is a 3.8% taxes on numerous kinds of investment income received by certain individuals, trusts, and estates. Who does it apply to? 125,000 for married filing separately) must pay the 3.8% NIIT on the smaller of (1) online-investment income, as described later, or (2) the amount where MAGI exceeds the suitable threshold. The NIIT will not apply to corporations, limited liability companies taxed as companies, or nonresident aliens.

What is Net Investment Income? For the purposes of NIIT, net investment income (NII) is defined as the following items. Interest, dividends, annuities, royalties, and rents less properly allocated deductions. Gross income from a small business or trade that is clearly a passive activity. Gross income from a small business or trade of trading in financial instruments or goods. Net gain from the disposition of nonbusiness property or the disposition of property held in a trade or business that is a passive activity. Any income, gain, or reduction attributable to an investment of working capital. Generally, NII only includes amounts that are contained in a regular taxable income for the year. Therefore, items such as tax-exempt interest aren’t included in NII.

Investment interest expense to the extent it is allowed for regular taxes purposes. Property fees on investment property. State and local income taxes paid on investment income. Investment expenditures more than … Read more