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Net Investment Income Tax (NIIT)

Summary and overview

The new 3.8% Medicare tax on net investment income took effect on January 1, 2013. It only affects higher-income individuals, but that can include anyone who has a big one-time shot of investment income or gain this year (or any other year). For example, if you sold some company stock for a big profit, you could be a victim. What to do? Read this for the first installment of our two-part series on strategies you can employ between now and the end of the year to avoid paying—or minimize your exposure to—the new tax.

Basics on the New Investment Income Tax
The following types of income and gain (net of related deductions) are generally included in the definition of net investment income and therefore potentially exposed to the new 3.8% tax.

  • Gains from selling investment assets—such as gains from stocks and securities held in taxable brokerage firm accounts, and real estate gains (including the taxable portion of a big gain from selling your principal residence).
  • Capital gain distributions from mutual funds.
  • Gross income from dividends.
  • Gross income from interest (not including tax-free interest such as municipal bond interest).
  • Gross income from royalties.
  • Gross income from non-qualified annuities.
  • Gross income and gains from passive business activities (business activities in which you don’t spend a significant amount of time) and gross income from rents.
  • Gains from selling passive partnership interests and S corporation stock (you don’t spend much time in the partnership or S corporation business activity).
  • Gross income and gains from trading in financial instruments or commodities.

Are You Exposed?
You are only exposed to the new 3.8% Medicare tax if your modified adjusted gross income (MAGI) exceeds the applicable threshold of: $200,000 if you are unmarried, $250,000 if you are a married joint-filer or qualifying widow or widower, or $125,000 if you use married filing separate status.
The amount hit with the 3.8% tax is the lesser of: (1) your net investment income or (2) the amount by which your MAGI exceeds the applicable threshold from above.

More information & Frequently Asked Questions

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