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NII Tax - Net Investment Income Tax

To pay for Healthcare and the other goodies we will receive Congress has created two new taxes for the coming year. While the final regulations are not out the proposed regs give an idea of how the tax will be collected and from whom. Remember, these are proposed regulations and are subject to change and are not effective until finalized. Both are a Medicare Tax; one on Net Investment Income and the other on earned income exceeding $250,000 for married filing jointly (MFJ), and $200,000 if a single filer (SF).

Net Investment Income Tax' (NII) is the first new tax and will be assessed on individuals with Modified Adjusted Gross Income (MAGI) above threshold amounts given in the chart below.

These threshold amounts are not indexed for inflation! If you are exempt from Medicare Taxes you may still be subject to the NII.

Investment Income comes from the taxpayer's passive income activities that generate interest, dividends, capital gains, rents, royalties, non-qualified annuities. This is not

an all inclusive list. Other forms of non-service income could be subject to this tax. Income not subject to this tax includes wages, unemployment compensation, operating income from non-passive businesses, social security, alimony, tax exempt interest, SE income.

Also the income from a business involved in the trading of financial instruments or commodities and businesses that are passive activities for the taxpayer is subject to NIIT. If you own an interest in a partnership, LLC or S corp and are not activiley involved in the enterprise your share of the income is subject to NIIT.

Capital gains from stocks, bonds and mutual funds are subject to NIIT as are capital gain distributions from mutual funds.

NIIT will not apply to any gain on the sale of a principle residence that is excluded from gross income for regular income purposes. However, the gain from investment real estate including the gain on the sale of a second home that is not a primary residence is subject to NIIT.

Gains from the sale of interests in partnerships and S corporations to the extent the taxpayer was a passive owner are subject to NII.

The tax is assessed on the Net Investment Income after applying deductions that are properly allocable to items of gross investment income; i,e, investment interest expense, investment advisory and brokerage fees, expenses related to rental and royalty income, and state and local property taxes.

Remember the regulations are proposed, the tax will be in effect for years beginning after December 31, 2012.

If you anticipate your MAGI exceeding the threshold and that you will have table net investment income you will want to make estimated tax payments. If you have substantial investment income increase your estimated tax deposit accordingly.