Understanding The Net Investment Income Tax
One of the most
significant tax changes affecting higher income taxpayers was
the Net Investment Income Tax that went into effect on January
While it tends to affect
wealthier individuals most often, in certain circumstances,
it can also affect moderate income
taxpayers whose income increases significantly in a given tax
Here's what you need to know:
WHAT IS THE NET INVESTMENT
The Net Investment Income Tax (NIIT) is a 3.8 percent tax on
certain net investment income of individuals, estates, and
trusts with income above statutory threshold amounts, referred
to as modified adjusted gross income or MAGI.
INCLUDED IN NET INVESTMENT INCOME?
In general, investment income includes, but is not limited to
interest, dividends, capital gains, rental and royalty income,
nonqualified annuities, income from businesses involved in
trading of financial instruments or commodities, and passive
business activities such as rental income or income derived
IS NOT INCLUDED IN NET INVESTMENT INCOME?
Wages, unemployment 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 with MAGI of $250,000 (married filing jointly) or
$200,000 for single filers are taxed at a flat rate of 3.8
percent on investment income such as dividends, taxable
interest, rents, royalties, certain income from trading
commodities, taxable income from investment annuities, REITs
and master limited partnerships, and long and short-term
The NIIT is a flat rate tax that is paid in addition to other
taxes owed, and threshold amounts are not indexed for
Non-resident aliens are not subject to the NIIT; 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
jointly, there are special rules. Please call if you have any
Investment income is generally not subject to withholding, so
NIIT is going to affect your tax liability for the 2016 tax
year. In addition, even lower income taxpayers not meeting the
threshold amounts may be subject to NIIT if they receive a
windfall such as a one-time sale of assets that bumps their
MAGI up high enough to be subject to the NIIT.
DID YOU KNOW
that Sullivan & Company manages Pension Funds,
Retirement Plans & Taxable Accounts through Archer
Investment Corporation & Fidelity Investments for our
Fidelity is the custodian for more
retirement plans than any other custodian in the United
Let Sullivan & Company Analyze Your Asset Allocation
& Risk Tolerance for FREE!
STRATEGIES TO MINIMIZE NIIT
Tax planning is crucial--for this year as well as next. If you
are anticipating a windfall this tax year or next, there are a
number of strategies that you could use to minimize your MAGI
and reduce or possibly eliminate tax liability when you file
your tax return. These include but are not limited to:
- Rental Real
Estate (depreciation deductions)
sales (including figuring out the best timing for sale)
SALE OF A HOME
The Net Investment Income Tax does not apply to any amount of
gain that is 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 from
gross income for regular income tax purposes. 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 is
over the MAGI threshold amount.
ESTATES AND TRUSTS AFFECTED
and Trusts are subject to NIIT 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 2016, this threshold
amount is $12,400.
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 the NIIT.
Please note, however, that non-qualified dividends generated
by investments in a REIT that are taxed at ordinary tax rates
may be subject to the Net Investment Income Tax.
Questions? If you need guidance on the NIIT and estates and
trusts, help is just a phone call away.
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
Individuals, estates, and trusts that expect to be pay
estimated taxes in 2016 or thereafter should adjust their
income tax withholding or estimated payments to account for
the tax increase in order to avoid underpayment penalties. For
employed individuals, the NIIT is not withheld from wages;
however, you may request that additional income tax be
Wondering how the Net Investment Income Tax affects you? Give
the office a call today and find out.
If you have any questions about the NIIT, don't hesitate to call the office if you would like more information
about the NIIT as well as any tax planning strategies this year. Help is just a phone call away at
Financial Services at Sullivan & Co. CPAs
Sullivan leads our Financial Services
Division and is here to help you navigate your
financial future. As an Investment Advisor Representative,
he 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 Paul Sullivan or Jane Huserova 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. We can help guide you in the right
you can call our offices if you have any questions about these
or any other accounting, tax, financial planning or insurance
related issues, at 301-657-8080.
Regards, Paul Sullivan, CPA
President, Sullivan & Company