Who pays the 3.8% tax?
Effective Jan. 1, 2013, individual taxpayers are liable for a 3.8 percent Net Investment Income Tax on the lesser of their net investment income, or the amount by which their modified adjusted gross income exceeds the statutory threshold amount based on their filing status.
The tax applies only to people with relatively high incomes. If you're single, you must pay the tax only if your adjusted gross income (AGI) is over $200,000. Married taxpayers filing jointly must have an AGI over $250,000 to be subject to the tax.
The net investment income tax is a 3.8% tax on investment income that typically applies only to high-income taxpayers. 1 It applies to individuals, families, estates, and trusts, but certain income thresholds must be met before the tax takes effect. Net investment income can be capital gains, interest, or dividends.
If your income is high enough to trigger the NIIT, shifting some income investments to tax-exempt bonds could result in less exposure to the tax. Tax-exempt bonds lower your MAGI and avoid the NIIT. Dividend-paying stocks are taxed more heavily as a result of the NIIT.
A Medicare surtax of 3.8% is charged on the lesser of (1) net investment income or (2) the excess of modified adjusted gross income over a set threshold amount. The threshold is $250,000 for joint filers, $125,000 for married filing separately, and $200,000 for all other filers.
The tax applies to taxpayers with modified adjusted gross income (MAGI) in excess of $200,000 if single or head of household and $250,000 if married filing jointly ($125,000 for married filing separately).
If you have investment income and go over the MAGI threshold, the 3.8% tax will apply to your net investment income or the portion of your MAGI that goes over the threshold—whichever is less.
A 3.8 percent net investment income tax (NIIT) applies to individuals, estates, and trusts that have net investment income above applicable threshold amounts.
| Your Filing Status | Threshold Amount |
|---|---|
| Single | $200,000 |
| Married Filing Jointly | $250,000 |
| Married Filing Separately | $125,000 |
| Head of Household (With Qualifying Person) | $200,000 |
Calculating NIIT is not just as simple as multiplying your net investment earnings by 3.8%. The IRS gives you a pass. You are charged 3.8% of the lesser of net investment income or the amount by which the MAGI exceeds the income thresholds you must pass to incur NIITs.
How do I avoid NIIT on my rental property?
Passive income from rental property that would otherwise be subject to the NIIT is recharacterized as non-passive if you rent the property to a business in which you materially participate. In other words, income from self-rentals is not included in net investment income.
Nonresident aliens and entities other than natural persons are not subject to the tax. The thresholds for individuals are: married filing jointly and qualifying surviving spouse, $250,000; married filing separately, $125,000; single and head of household, $200,000. The thresholds are not indexed for inflation.
This net investment income tax also applies to certain trusts and estates. It does not apply to corporations and other “active” businesses. It does not apply to trusts associated with IRAs or pension plans.
This additional tax is used to help fund the Affordable Care Act tax provisions, including the premium tax credit.
Pension payments, annuities, and the interest or dividends from your savings and investments are not earnings for Social Security purposes. You may need to pay income tax, but you do not pay Social Security taxes.
| Filing status | MAGI threshold |
|---|---|
| Single | $200,000 |
| Married filing jointly | $250,000 |
| Married filing separately | $125,000 |
Section 1411(a)(2) imposes Medicare tax for each tax year on an estate or trust equal to 3.8% of the lesser of: (1) The estate's or trust's undistributed net investment income. Summary of when no tax is due.
Can you Opt Out of Medicare Tax? While regular taxpayers may not opt out, there are certain religious groups which may qualify and be exempt from paying Social Security taxes. The qualifications for this are: Waive rights to all Social Security benefits including hospital care.
What's so wrong with receiving a big tax refund? There's nothing erroneous or wrong about getting a large refund, but it probably means that you overpaid taxes during the year if you do. The IRS is just returning that overpayment to you without interest.
The $3,000 loss limit is the amount that can go against ordinary income. Above $3,000 is where things can get a little complicated. The $3,000 loss limit rule can be found in IRC Section 1211(b). For investors who have more than $3,000 in capital losses, the remaining amount can't be used toward the current tax year.
What is the extra tax for high income earners?
High-income taxpayers face two special taxes — a 3.8% net investment income tax (NIIT) and a 0.9% additional Medicare tax on wage and self-employment income. Here's an overview of the taxes and what they may mean for you.
Because gain from the sale of personal goodwill is income from a personally developed intangible asset that is not passive income, and, generally, income from personal service activities is not passive, the gain from the sale of personal goodwill should not be subject to the net investment income tax.
One of the many taxes imposed by the Affordable Care Act is the 3.8% Net Investment Income Tax. Under the Internal Revenue Code, Section 1411, the Net Investment Income Tax or NIIT, applies to certain net investment income of individuals, estates and trust that have income above the statutory threshold.
In general, you can carry capital losses forward indefinitely, either until you use them all up or until they run out. Carryovers of capital losses have no time limit, so you can use them to offset capital gains or as a deduction against ordinary income in subsequent tax years until they are exhausted.
What about sales of real estate? Gains from the disposition of property (other than property held in an active trade or business) is subject to NIIT, including gain on the sale of stocks, bonds, mutual funds and real estate.
