Before taxes, investment assets such as bonds, equities, mutual funds, loans, and other investments generate income known as net investment income tax (NIIT). Whether net investment income consists of capital gains, dividends, or interest will affect the individual tax rate.
Net Investment Income Tax (NIIT) Explained
An IRS tax on certain people, estates, and trusts’ net investment income is known as the net investment income tax or NIIT. More specifically, this applies if your modified adjusted gross income (MAGI) exceeds the filing status-based thresholds set by the IRS by a greater amount than the lesser of your net investment income or your MAGI. For the tax year 2022, the NIIT is set at 3.8 percent.
Who’s Subject To The Net Investment Income Tax?
Only individuals who earn more than a specific amount will be required to pay the NIIT; everyone else would be exempt. The following are the IRS’s statutory income thresholds:
- Married filing jointly — $250,000
- Married filing separately — $125,000
- Single or head of household — $200,000
- Qualifying widow(er) with a child — $250,000
If your net investment income or the amount of your MAGI exceeds the income thresholds based on your filing status, you must decide which is greater. The lesser of the two figures is the one that will be charged an extra 3.8 percent tax.
Here’s How To Calculate The Net Investment Income Tax
If you are subject to the net investment income tax, it is determined by your modified adjusted gross income (MAGI). A few deductions, such as IRA contributions, passive loss or income, taxable Social Security payments, student loan interest, and others, can be added back to your adjusted gross income (AGI) to determine your MAGI. Form 1040, Line 8b, is where you can find your AGI. You must pay the net investment income tax if your MAGI exceeds the legal limit for your filing status.
The next step is to calculate your net investment income using the above-mentioned included earnings. However, you must first determine your gross investment income in order to compute your NIIT. Once you have that, you may calculate your NIIT by deducting all allowable deductions from your gross investment income. Brokerage fees, investment advisory fees, tax preparation fees, local and state income taxes, fiduciary expenditures, investment interest expenses, and any expenses related to rental and royalty revenue are a few examples of frequent investment deductions.
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