Net Investment Income Tax (NIIT)
Starting in 2013 a 3.8% Medicare tax is imposed on certain net investment income (NII) of individuals, estates, and trusts by the 26 USC § 1411 on the lesser of:
1. Taxpayer’s net investment income is the investment income reduced by applicable associated cost; interest, dividends,rents, annuities, royalties, and net capital gains from disposition of property not used in a trade or business, or
2. Modified Adjusted Gross Income (MAGI; adjusted for foreign earnings) that exceeds the threshold of $250,000 for married filing joint taxpayers or $200,000 for single taxpayers.
In general, investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, nonqualified annuities, income from businesses involved in trading of financial instruments or commodities, and businesses that are passive activities to the taxpayer. The NII is reduced by certain expenses properly allocable to the income.
Kinds of gains are included in Net Investment Income
To the extent that gains are not otherwise offset by capital losses, the following gains are common examples of items taken into account in computing the NII:
a) Gains from the sale of stocks, bonds, and mutual funds. b) Capital gain distributions from mutual funds. c) Gains from the sale of investment real estate, including gain from the sale of a second home. d) Gains from the sale of interests in partnerships and S corporations to the extent you were a passive owner.
What are some common types of income that are not NII?
Wages, unemployment compensation, operating income from a non-passive business, Social Security Benefits, alimony, tax-exempt interest, self-employment income, gain on the sale of a personal residence, and distributions from certain Qualified Plans.