June 6, 2014
Are you subject to the new 3.8% Net Investment Income Tax (NIIT) that went into effect in 2013? If so, you may want to do planning to make sure you have paid in enough tax to avoid penalties, or to avoid paying the tax.
What is the Net Investment Income Tax?
NIIT is a 3.8% tax rate that applies to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts.
What is Net Investment Income (NII)?
Net Investment income can be derived from the following:
What is Not Included in Net Investment Income?
Individuals Subject to Net Investment Income Tax
U.S. citizens with modified adjusted gross income (AGI) above the following thresholds are subject to NIIT:
If you do not exceed the threshold amounts then you are not subject to NIIT. However, if you exceed the threshold amounts and have investment income then you will be subject to the 3.8% tax on net investment income.
Estates and Trusts Subject to Net Investment Income Tax
Estates and trusts with undistributed net investment income and AGI above $12,150 for 2014 are subject to NIIT except for certain trusts including the following:
The lesser of net investment income or modified adjusted gross income over the specified threshold amount (see above) for the filing status is subject to the additional 3.8% tax.
Deductions allowed in computing NII
Certain deductions allocable to investment income are allowed in determining NII:
Estimated Taxes and Withholding
If you expect that you may be liable for the NIIT then you should request additional withholding or make estimated tax payments as necessary to avoid an underpayment penalty.
Possible Planning Strategies
Strategies to avoid the NII tax involve reducing adjusted gross income and net investment income.
Possibilities to consider:
Many highlights included above were obtained from “Questions and Answers on the Net Investment Income Tax,” from the IRS website. This is only a brief overview associated with net investment income tax and is by no means comprehensive.
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