How Does the Net Investment Income Tax Work?
The Net Investment Income Tax is a 3.8% tax on net investment income, such as capital gains, dividends, interest, and other income after allowable exclusions, to the extent that the net amount exceeds the modified adjusted gross income (MAGI) thresholds. This tax applies only to high-income taxpayers, such as single individuals whose MAGI exceeds $200,000 and married couples whose MAGI exceeds $250,000, along with certain estates and trusts. This tax was implemented at the beginning of 2013.
How Has the Net Investment Income Tax Evolved?
The Net Investment Income Tax was legislated as part of the Affordable Care Act (ACA) in 2010, which took effect in March 2010, and was included in this law to increase revenue. However, the net investment tax became effective on January 1, 2013.
Do I Need to Pay the Net Investment Income Tax?
The thresholds for the Net Investment Income Tax depend on filing status and income. You might be subject to this tax if you have investment income and your modified adjusted gross income (MAGI) exceeds the stipulated limits. This tax is paid in addition to your income tax obligation. It also adds to what you have paid into healthcare through withholding from earned income or estimated taxes. However, you’re subject to this tax only if you have investment income and exceed MAGI at these limits.
How Do I Pay the Net Investment Income Tax?
File IRS Form 8960 with your tax return if you are subject to the Net Investment Income Tax. The form comes with instructions to help you determine the amount owed, and it should be used by individuals and estates or trusts. Please note that if you owe this tax, you will need to make quarterly estimated payments on the amount you believe you will owe, in addition to any quarterly income tax payments.
How Can I Calculate My Net Investment Income Tax Liability?
You can use IRS Form 1040 to calculate your Net Investment Income Tax. First, calculate your MAGI. Start with your adjusted gross income (see line 11 of your 1040 form). Then you can use Form 8960 to determine your MAGI for the Net Investment Income Tax. Keep in mind that you may need to make adjustments if you are participating in certain types of foreign entities. This figure is your modified adjusted gross income for the Net Investment Tax, which may differ slightly from your MAGI for other tax calculations.
How Can I Calculate My Net Investment Income Tax Liability?
The Net Investment Income Tax is owed on the lesser of your undistributed net investment income or the portion that exceeds your MAGI. Multiply the lesser amount by 0.038 (3.8%). This is the amount of Net Investment Income Tax you will pay.
Frequently Asked Questions (FAQs)
Why Do I Owe the Net Investment Income Tax?
If you are earning profits from your investments, you may owe the Net Investment Income Tax if your modified adjusted gross income (MAGI) is $125,000 or more, depending on your tax filing status. Single individuals need to earn at least $200,000 to qualify for this tax, and married couples need to earn at least $250,000 to qualify for this tax.
Does Investment Income Include IRA Distributions?
The IRS does not tax IRA or other retirement plan distributions as part of net investment income. Social Security benefits and tax-exempt interest from municipal bonds, along with payments from retirement or pension plans and life insurance proceeds, are also not considered part of net investment income per IRS definition.
Source:
https://www.thebalancemoney.com/net-investment-income-tax-3192936
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