Net Investment Income Tax:
What You Need to Know
the 2012 tax season is over, it's time to focus on tax
planning for 2013.
One of the most significant tax
changes this year is the Net Investment Income Tax (NIIT),
which went into effect on January 1, 2013 as a result
of health care reform enacted in 2010. Here's what you need to
What is the Net Investment Income
The Net Investment Income Tax is
a 3.8% tax on certain net investment income of
individuals, estates, and trusts with income above statutory
threshold amounts, referred to as modified adjusted gross
What is Included in Net Investment
In general, investment income
includes, but is not limited to: interest, dividends, long
and short term capital gains, rental and royalty income,
non-qualified annuities, income from businesses involved in
trading of financial instruments or commodities, and passive
business activities such as rental income or income derived
What is Not Included in Net
compensation, operating income from a nonpassive business,
Social Security Benefits, alimony, tax-exempt interest,
self-employment income, Alaska Permanent Fund Dividends, and
distributions from certain Qualified Plans are not included in
net investment income.
Individuals whose modified
adjusted gross income exceeds $250,000 (married filing
jointly) or $200,000 (single filers) are taxed at a
flat rate of 3.8% on investment income. Net Investment Income
Tax is paid in addition to other taxes owed and threshold
amounts (e.g. $200,000 for single filers) are not indexed for
Non-resident aliens are not subject to the tax; however, if a
non-resident alien is married to a US citizen and is planning
to file as a resident alien for the purposes of filing
"married filing jointly" tax return, there are special rules.
Please consult us if you have any questions.
Because investment income is generally not subject to
withholding, taxpayers should be aware that the NIIT might
affect tax liability for the 2013 tax year. In addition, it's
possible that even lower income taxpayers not meeting the
threshold amounts could be subject to the tax if they receive
a windfall such as a one-time sale of assets that bumps their
MAGI up high enough.
Give us a call if you are expecting a
windfall this year. We'll help you come up with a
strategy such as an installment sale, minimizing AGI, or
figuring out the best timing for sale, that will help you to
avoid or minimize taxes when you file your 2013 return next
Sale of a Home
Net Investment Income Tax does not apply to any amount of gain
excluded from gross income for regular income tax purposes
($250,000 for single filers and $500,000 for a married couple)
on the sale of a principal residence.
In other words, only the taxable
part of any gain on the sale of a home has the potential to be
subject to NIIT, providing the taxpayer's income is over the
MAGI threshold amount.
Estates and Trusts
Estates and Trusts are subject
to the Net Investment Income Tax if they have undistributed
net investment income and also have adjusted gross income over
the dollar amount at which the highest tax bracket for an
estate or trust begins for such taxable year. In 2013, this
threshold amount is $11,950.
Special rules apply for certain unique types of trusts such a
Charitable Remainder Trusts and Electing Small Business
Trusts, and some trusts, including "Grantor Trusts" and Real
Estate Investment Trusts (REIT) are not subject to NIIT at
It should be noted that non-qualified dividends generated by
investments in a REIT are considered taxable income and taxed
at ordinary tax rates. As such, they may be subject to the Net
Investment Income Tax.
If you need guidance on the topic of
Net Investment Income Tax and estates and trusts, don't
hesitate to call us.
Reporting and Paying the Net Investment Income Tax
Individual taxpayers should
report (and pay) the tax on Form 1040. Estates and Trusts
report (and pay) the tax on Form 1041.
Individuals, estates, and trusts that expect to pay estimated
taxes in 2013 should adjust their income tax withholding or
estimated payments to account for the tax increase in order to
avoid underpayment penalties. For employed individuals, NIIT
is not withheld from wages; however, you may request that
additional income tax be withheld. Call us if you need
assistance with this.
Wondering how the new tax affects
you? Give us a call at 301-657-8080. It's never too
early to start tax planning!
Financial Services at Sullivan & Company, CPAs
Grow leads our Financial Services Division and is here to
help you navigate your financial future. As an Investment
Advisor Representative, she is able to provide an
independent opinion on the investments you already own or
are considering buying.
We can structure a portfolio
based on your risk tolerance or we can help you decide how
to invest in your company 401(k) plan. We work with each
client to identify their concerns and to provide solutions
according to their situation.
is also experienced in company retirement plans. If you own
a business that does not have a plan; we can discuss your
options and set up a plan that fits your company.
If your business already has a
plan; we offer a free evaluation of the plan to ensure that
it is up to date and working well for you and your
Our goal is to provide personal, unbiased and independent
advice to help you make well-informed decisions about your
financial life and investments.
Contact Kathy Grow or Jordana Para to set up a free initial
consultation (301) 657-8080.
And as always if you have any questions about accounting or
investments and how they effect you or your business, please give
us a call at
(240) 316-3564. We
can help guide you in the right direction.
Remember you can call our offices if you have any
questions about these or any other accounting, tax,
financial planning or insurance related issues, at
Regards, Paul Sullivan, CPA
President, Sullivan & Company