Net Investment Income Tax

If you become the fortunate recipient of a high return investment, then you need to know about the net investment income tax.

What is it net investment income (NII)?

In general, investment income includes, but is not limited to: 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 (within the meaning of section 469). To calculate your Net Investment Income, your investment income is reduced by certain expenses properly allocable to the income (see below).

What is (NII) tax?

A 3.8% tax on individuals, estates, and trusts that have modified adjusted gross income over the threshold amount (see image below for individual threshold amount).

What expenses are deductible in computing NII?

Examples of net investment expenses include investment interest expenses, investment advisory and brokerage fees, expenses related to rent and royalty income, tax preparation fees, fiduciary expenses (in the case of an estate or trust) and state and local income taxes.

Where is the tax reported and paid?

The tax is included and paid with Form 1040 using Form 8960.

The IRS has a very thorough description of the Net Investment Income Tax. Please click here for more information.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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