What is the NIIT tax rate?
A 3.8 percent net investment income tax (NIIT) applies to individuals, estates, and trusts that have net investment income above applicable threshold amounts.
Accordingly, the net investment income tax (NIIT) will take a 3.8% bite out of a portion of your investment earnings. There are, however, a number of restrictions on what the NIIT does and doesn't apply to. Take a look through our detailed guide below for more insight.
NIIT is a tax on net investment income. Those who are subject to the tax will pay 3.8 percent on the lesser of the following: their net investment income or the amount by which their modified adjusted gross income (MAGI) extends beyond their specific income threshold.
Overview of the NIIT
The NIIT is equal to 3.8% of the net investment income of individuals, estates, and certain trusts. Net investment income includes interest, dividends, annuities, royalties, certain rents, and certain other passive business income not subject to the corporate tax.
As an investor, you may owe an additional 3.8% tax called net investment income tax (NIIT). But you'll only owe it if you have investment income and your modified adjusted gross income (MAGI) goes over a certain amount.
The Net Investment Income Tax is imposed by section 1411 of the Internal Revenue Code. The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts.
The NIIT applies to income from a trade or business that is (1) a passive activity, as determined under § 469, of the taxpayer; or (2) trading in financial instruments or commodities, as determined under § 475(e)(2). The NIIT doesn't apply to wages, unemployment compensation, or income from a nonpassive business.
Sell investments at a loss to offset investment gains. Defer capital gain, such as selling the investment in the future instead of selling it now. Use Section 1031 like-kind exchange which is selling an investment property and using that money to buy another investment property.
For example, if you were a single filer who earned $250,000, and $25,000 of that was net investment income, your NIIT would be based on only the income you earned from your investments. That's because $25,000 is less than $50,000—the difference between the $200,000 cutoff and $250,000. Your NIIT would then be $950.
Effective Jan. 1, 2013, individual taxpayers are liable for a 3.8 percent Net Investment Income Tax on the lesser of their net investment income, or the amount by which their modified adjusted gross income exceeds the statutory threshold amount based on their filing status.
Which IRS form is used to calculate the 3.8% net investment income tax?
Use Form 8960 to figure the amount of your Net Investment Income Tax (NIIT). Controlled foreign corporation (CFC).
This net investment income tax also applies to certain trusts and estates. It does not apply to corporations and other “active” businesses. It does not apply to trusts associated with IRAs or pension plans.
The NIIT is a 3.8% income tax on unearned income (income other than from a job or business). It was implemented with the passing of Obamacare. Net rental income is subject to the NIIT and so is the capital gain on the sale of rental property.
However, with proactive planning, you may be able to reduce the amount you owe on your 2024 federal income tax return. The 3.8% NIIT is applied to the lesser of: The amount by which your modified adjust gross income (MAGI) exceeds the applicable threshold, or. Your net investment income.
NIIT doesn't discriminate: it targets individuals, estates, and trusts, but only if they are on the higher end of the income spectrum. For individuals, the thresholds are: Single or head of household: $200,000. Married filing jointly: $250,000.
Although distributions from a traditional IRA aren't subject to NIIT, they do increase your modified adjusted gross income, which can trigger or increase the NIIT. This is true for the conversion to a Roth IRA. Distributions from Roth IRAs are excluded from gross income, so they aren't subject to NIIT.
If the CD is placed in a tax-deferred 401(k) or individual retirement account (IRA), any interest earned on the CD may be exempt from paying taxes in the year it was earned. 2 Instead, you will pay taxes on that money when it is withdrawn from the 401(k) or IRA after you retire.
The $3,000 loss limit is the amount that can be offset against ordinary income. Above $3,000 is where things can get complicated.
As mentioned, net investment is calculated by subtracting depreciation from gross capital expenditures. Capital assets that are purchased usually deteriorate over their useful lives. The deterioration of assets comes from several factors, such as: Breakdown of the assets.
What is the 3.8% “MEDICARE TAX” or NET INVESTMENT INCOME TAX (“NIIT”)? Many investors selling real estate or other high value investments are often surprised to find out that their tax liability could be subject to an extra 3.8% surtax in addition to the applicable short-term or long-term capital gains tax rates.
What are the exceptions to the NIIT?
The NIIT isn't levied on any interest and dividends that are normally excluded from federal income tax. At the top of the list for investors: tax-exempt state and municipal bond interest. Moreover, tax-exempt interest doesn't count in your MAGI for NIIT, so it could help keep you below the $200,000/$250,000 threshold.
Because gain from the sale of personal goodwill is income from a personally developed intangible asset that is not passive income, and, generally, income from personal service activities is not passive, the gain from the sale of personal goodwill should not be subject to the net investment income tax.
Now, the law doesn't allow deductions of investment management fees and other related expenses. These include: Financial advisor fees. Custodial fees for individual retirement accounts (IRAs) and other investment accounts.
In general, you can carry capital losses forward indefinitely, either until you use them all up or until they run out. Carryovers of capital losses have no time limit, so you can use them to offset capital gains or as a deduction against ordinary income in subsequent tax years until they are exhausted.
Incentive Stock Options and the Net Investment Income Tax (NIIT) The NIIT is an additional tax that is levied on investment income if your income exceeds certain breakpoints. The tax is 3.8% on investment income in excess of $250,000 (if you file Married Filing Jointly) and $200,000 (if you file single).
