As with all good tax questions, the answer is: It Depends! The new 3.8% tax on your Net Investment Income (NII) only kicks in at the higher adjusted gross income (AGI) levels. So unless you are in the top 3% of earners then the answer is no.
But if your AGI is over the threshold then you will possibly have to pay an additional 3.8% on the NII. The thresholds are $200,000 if unmarried, $250,000 if married filing jointly, and $125,000 if married filing separately.
Once you have determined that your income is over the threshold, you must determine what types of income applies. The IRS, of course, has a handy new form, the Form 8960, for just that calculation. The long and short of it boils down to this. You will pay the additional tax on the lesser of the amount of your NII or the amount of your income over the threshold.
For example: Your AGI as a single person is $210,000. You have $20,000 in NII. So you will pay the additional 3.8% tax of $10,000. The lesser of the amount over the threshold or your NII. If your AGI in this same situation was $230,000 you would pay the additional tax on the $20,000 of NII.
So, you ask, what exactly is counted towards my NII? For the most part things you would normally assume are investment income, like interest, dividends, and capital gains (long or short term).
There are some other things included you may not think about right off hand, like rents, royalties, annuity payments, passive activity income, and income from the disposition of property. I think the thing that surprised me most on this list was the annuity payments. You just don’t normally consider things that come to you on a 1099R as an investment.
This is the short version of this new tax. If you have any reason to believe you or your clients may fall into this category, please consult with a qualified tax professional as this is gonna get tricky. If you are a qualified tax professional, please get well versed on this subject. There is a lot of info out there on this subject and there are a lot of blogs right here on TaxConnections in the archive that address the differing aspects of this new regulation.
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