Net Investment Income Tax

As part of last January’s tax changes, a new tax has quietly been put in place that hasn’t received much press. Beginning in 2013, the new 3.8% Net Investment Income Tax (NIIT) may be in effect for certain individuals, estates, and trusts.

This tax is assessed when an individual’s modified adjusted gross income (MAGI) exceeds $200,000 for those filing as single, and $250,000 for a married couple filing jointly. The amount subject to the NIIT is the lesser of net investment income or the amount by which MAGI exceeds the applicable threshold. But wait, it gets even better for trusts and estates. For them, the NIIT applies to the lesser of the undistributed net investment income or AGI in excess of $11,950.

So, just what is “Net Investment Income”? The IRS includes, but is not limited to the following: 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. Tax-exempt interest and qualified retirement plan distributions are not subject to the NIIT.

This tax has not been talked about much and could come as a big surprise to many taxpayers next April when you’re filing your returns. Now is the perfect time to meet with us and determine the potential impact this tax will have on you. Please give us a call and we’ll set up a meeting to start the planning process.

/posted by Chris Hatcher, CPA, CFE, CFF