Starting with the year 2013, taxpayers may be subject to an additional surtax of 3.8% on their net investment income. This surtax is called the Net Investment Income Tax (NIIT).
Who is Subject to the Net Investment Income Tax? The Net Investment Income Tax is imposed on individuals, estates and trusts.
For individuals, the net investment income tax applies to U.S. citizens and resident aliens. The net investment income tax does not apply to non-resident aliens unless a non-resident alien elects to be treated as a resident of the U.S. for tax purposes. Taxpayers will pay NIIT on the lesser of:
• The taxpayer’s “net investment income,” or
• The excess of the taxpayer’s “modified adjusted gross income (MAGI)”, over
• $250,000 if married filing jointly,
• $125,000 if married filing separately, or
• $200,000 for all other taxpayers.
The net investment income tax also applies to estates and trusts if the estate’s or trust’s adjusted gross income for the year exceeds the dollar amount at which the highest tax bracket begins. For the year 2013, the highest tax bracket for estates and trusts begins at $11,950.
What’s subject to the NIIT? Generally interest, dividends, annuities, rental and royalty income, capital gains, businesses that are taxed on your return as “passive activities” and income from businesses involved in the trading of financial instruments or commodities.
Deductions that reduce net investment income are:
• Deductions related to producing rental and royalty income
• Deductions related to producing business income
• Penalty on early withdrawal of savings
• Investment Interest expenses
• Miscellaneous investment expenses
• The portion of state income tax that relates to net investment income
• Casualty and theft losses related to property that was sold or disposed of
IRS provided that the Code Sec. 1411 NIIT is subject to the estimated tax provisions. Therefore, taxpayers must take the NIIT into account when making estimated tax payments. Taxpayers may need to increase their income tax withholding or estimated taxes this year to consider any additional tax liability associated with the NIIT in order to avoid certain penalties.
If you have any questions regarding the impact of NIIT on your personal tax situation, please do not hesitate to contact us.