Net Investment Income Tax 2021: What You Need To Know
The Basics About the Net Investment Income Tax
The Net Investment Income Tax (NIIT) is a 3.8% tax on individuals, estates, and trusts that have income from investments, such as interest, dividends, capital gains, and rental income. The NIIT was enacted as part of the Affordable Care Act, and it applies to all taxpayers, regardless of their tax bracket. The tax applies to net income, meaning that any losses can be deducted from the total income before the tax is applied.
The tax applies to individuals, estates, and trusts that have a total modified adjusted gross income (MAGI) of more than $200,000 for single filers or $250,000 for married couples filing jointly. The tax applies to any income above this threshold. This means that if a single filer has a MAGI of $220,000, the NIIT will only apply to the $20,000 that is over the $200,000 threshold.
Who Is Exempt from the Tax?
Certain taxpayers are exempt from the NIIT. These include:
- Taxpayers with MAGI below the threshold.
- Taxpayers who are filing as a corporation.
- Taxpayers who are filing as a partnership.
- Taxpayers who are filing as a tax-exempt organization.
- Taxpayers who are filing as a real estate investment trust.
What Types of Income Are Subject to the Tax?
The NIIT applies to the following types of income:
- Interest income.
- Dividend income.
- Capital gains from the sale of investments.
- Income from rental properties.
- Income from royalties.
- Income from annuities.
- Income from pass-through entities, such as partnerships and S corporations.
What Are the Exemptions and Deductions?
There are certain exemptions and deductions that are available to taxpayers who are subject to the NIIT. These include:
- Qualified retirement plan contributions.
- Interest paid on qualified student loans.
- Charitable donations.
- Mortgage interest payments.
- State and local taxes.
How Is the Tax Calculated?
The NIIT is calculated by first taking the taxpayer’s total net investment income and subtracting any deductions and exemptions. The resulting amount is then multiplied by 3.8%, which is the NIIT rate. The resulting amount is the amount of tax that is due.
How Is the Tax Paid?
The NIIT is paid as part of the taxpayer’s income tax return. Taxpayers must report their net investment income and calculate the tax due on Form 8960. This form must be included with the taxpayer’s income tax return. The tax is then paid when the return is filed.
What Are the Penalties for Not Paying the Tax?
Taxpayers who fail to pay the NIIT when it is due may be subject to penalties, interest, and other fees. The IRS may also impose civil or criminal penalties on taxpayers who are found to have willfully failed to pay the tax.
Conclusion
The Net Investment Income Tax is a 3.8% tax that applies to individuals, estates, and trusts that have income from investments. The tax applies to all taxpayers, regardless of their tax bracket, and it applies to net income, meaning that any losses can be deducted from the total income before the tax is applied. The tax is calculated on Form 8960 and must be paid when the taxpayer’s income tax return is filed. Taxpayers who fail to pay the tax may be subject to penalties, interest, and other fees.