Four Things to Know about Net Investment Tax

Brian SingletonBlog, Watch Your Wallet

Certain taxpayers may be subject to the Net Investment Income Tax, which went into effect last year, in 2013. You may owe this tax if you have income from investments and your income for the year is more than certain limits. Here are four things that you should know about this tax:

1. Net Investment Income Tax. The law requires a tax of 3.8 percent on the lesser of either your net investment income or the amount by which your modified adjusted gross income exceeds a threshold amount based on your filing status.

2. Net investment income. This amount generally includes income such as:

  • Interest
  • dividends
  • capital gains
  • rental and royalty income
  • non-qualified annuities

Keep in mind, however, that this list is not all-inclusive. Net investment income normally does not include wages and most self-employment income. It does not include unemployment compensation, Social Security benefits or alimony. Net investment income also does not include any gain on the sale of your main home that you exclude from your income.

After you add up your total investment income, you then subtract your deductions that are properly allocable to this income. The result is your net investment income. Don’t hesitate to call us if you need help figuring out your net investment income or MAGI (modified adjusted gross income).

3. Income threshold amounts. You may owe the tax if you have net investment income, and your modified adjusted gross income is more than the following amount for your filing status:

Filing Status / Threshold Amount

Single or Head of household — $200,000

Married filing jointly — $250,000

Married filing separately — $125,000

Qualifying widow(er) with a child — $250,000

4. How to report. If you owe this tax, you must file Form 8960 with your federal tax return. If you had too little tax withheld or did not pay enough estimated taxes, you may have to pay an estimated tax penalty.

For more information about this topic please contact us.