Is the Net Investment Income Tax Still In Effect?

What is it?

The Net Investment Income Tax (NIIT) was enacted in 2013. This tax boosted IRS revenue collections by broadening its reach to unearned investment income. The official name is the “Unearned Income Medicare Contribution Tax.” That may suggest it was intended to fund Medicare however the raised funds go into the nation’s general fund. You may be subject to the NIIT even if you are exempt from the Additional Medicare tax. The two taxes apply to different types of income.

Do I Need To Pay The NIIT?

The NIIT is a 3.8% tax on investment income for anyone earning over $125,000 if you are married filing separately,  $200,000 as an individual, or married filing jointly and making more than $250,000 annually. Qualifying income includes dividends, capital gains, annuities, royalties, rents, trading in financial instruments and commodities, passive income, the net gain from property sales other than property held in trade, and most interest.

If you fall into this category, take heart, some expenses and losses are allowed as deductions to determine the net investment income. Tax-exempt interest is not included in net investment income, nor is it subject to withholding. There are deductions related to producing rental and royalty income. Rents and profit on the sale of property are normally subject to this tax except rental income from renting out your home for less than 14 days per year. Casualty and theft losses related to the property sold or disposed, investment interest expenses, and other miscellaneous investment expenses are eligible as a deduction.

Some deductions are included in the investment income figures, such as rental income, royalty income, business income, and net capital gains. Others are deducted against investment income, such as the penalty on investment interest, investment expenses, early withdrawal of savings, state income tax allocated to investment income, and casualty and theft losses related to investment property. If the taxpayer has received passive investment income and is involved in the operation of a trade or business, the passive income may be excluded from NIIT taxation.

How To Pay The Net Investment Income Tax

IRS Form 8960 must be submitted in addition to your tax return. If you plan to file it on your own, read the IRS instructions. The form is used by individuals, estates, and trusts.

To answer the question in the title yes, the Net Investment Income tax is still in effect and will likely be with us for years to come. If you’re worried about being subject to this obligation, be sure to take all the necessary steps, including consulting with professionals. They will have insights into what could help lessen the burden.