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Duration: 4:16

Instructor:

Contributor: Interactive Brokers

Level: Beginner

The main topics of this lesson are: Net Investment Income Tax; What is “higher income”?; What income is subject to the tax?; and Special Considerations for Partners/Business. For this lesson refer to the Study Notes and watch the video for a synopsis.

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Study Notes:

History

The Net Investment Income Tax (or NII) is not truly a tax – at least not in the purest sense of the word.
Enacted as part of the Affordable Care Act, the intent was to have higher income taxpayers pay an
additional 3.8% tax to offset the costs of the coverage now required under the act.

What is “higher income”?

Higher income taxpayers are those with modified adjusted gross income in excess of $250,000 for
married filing jointly taxpayers or $200,000 for single taxpayers. Modified adjusted gross income, as a
simple definition, is income before itemized or standard deductions and any exemptions.

Unlike most tax thresholds the starting point for the assessment of NII is fixed and does not adjust with
inflation.

What income is subject to the tax?

The additional 3.8% tax is assessed on:
• Interest
• Dividends (including qualified dividends)
• Rents
• Royalties
• Income from passive activities such as rental real estate
• Gains from the sale of most properties and all securities.

Special Considerations for Partners/Business

If you are part of an operating business that generates interest as part of its ordinary course of business
– that is considered business income that is not passive and not subject to NII. Interest, dividends and
capital gains generated by investments made by the business is subject to NII.

Consider it this way:

• income from operations – no NII
• income from investment – yes NII.
• Passive income – – yes NII

 

Disclosure: Tax-Related Circular 230 Notice

The information in this presentation is provided for informational purposes only, and does not constitute tax advice and cannot be used by the recipient or any other taxpayer to avoid penalties under any federal, state, local or other tax statutes or regulations, or to resolve any tax issue.

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