Understanding the Net Investment Income Tax

Beginning in 2013, noncorporate taxpayers -- that is, individuals, trusts, and estates -- are subject to a net investment income tax (NIIT). Specifically, such individuals are subject to a 3.8% tax on income and gain from investments, provided they have net investment income (NII) and modified adjusted gross income (MAGI) in excess of certain thresholds. It is estimated that only 2%-3% of all taxpayers will be subject to the NIIT. Under Internal Revenue Code (IRC) sections 1411(a)(1) and (b), the NIIT for individuals is equal to 3.8% times the lesser of NII or MAGI in excess of the following thresholds: $200,000 for single individuals and heads of households and $250,000 for joint filers and surviving spouses. Most high-income individuals have NII; however, if they do not have excess MAGI, they are not subject to the NIIT. MAGI is AGI plus foreign earned income, net of associated expenses, that is otherwise excluded under IRC section 911.