How To Calculate And Report The Net Investment Income Tax

A relatively new federal income tax on investment income became effective in 2013 for some tax filers. The tax is applicable to individuals with higher incomes. Some tax filers must now complete an additional tax form to report and pay the additional tax on net investment income.

Investment income includes items such as interest, dividends, capital gains, and rental income. Net investment income is derived by subtracting investment expenses from investment income. Qualifying expenses include items such as brokerage fees, investment advice, and interest expense.

Income thresholds

The tax is referred to as the net investment income tax. Although the tax is only on investment income, it may be applicable to tax filers with total income above the following thresholds:

  • $200,000 for single status
  • $250,000 for married filing jointly
  • $125,000 for married filing separately
  • $200,000 for head of household
  • $250,000 for qualifying widow or widower

Tax calculation

If your income is less than the threshold amount for your filing status, you are not subject to the net investment income tax. If your income exceeds the threshold, the tax is 3.8 percent of the lesser of the following:

  • Your net investment income
  • The amount by which your total income exceeds your filing status threshold

Investment income that is nontaxable, such as municipal bond interest, is not considered for purposes of the net investment income tax. A nontaxable gain on the sale of a personal residence is also not included as investment income, since the gain is nontaxable income. However, a gain on the sale of a second residence is included as investment income.

Form completion

The net investment income tax is calculated on IRS Form 8960, which is filed with your personal income tax return. Form 1040 has a specific line designated for various types of additional taxes, including the net investment income tax.

If you have excluded foreign earned income, you may need to add it back to your other income before comparing the total with your filing status threshold. The net investment income tax generally does not apply to nonresident aliens.

The net investment income tax is not to be confused with the additional Medicare tax, which became effective on the same day of the same year. Even though some of the income thresholds are the same, the two taxes on higher-income tax filers are separate.

The net investment income tax is permanent, so you may need to adjust your withholding if you are affected. Contact an accounting firm such as Herman & Cormany for further assistance in tax preparation.