Net Investment Income Tax (NIIT)
The NIIT is a tax at the rate of 3.8% that is applied to many different investments and is assessed on trusts, estates and individuals if their income is above the statutory threshold amounts.
Individuals who are exempt from Medicare taxes, may still be subject to NIIT if they have investment income and also have modifies adjusted gross income over the applicable threshold.
If one has income from Controlled Foreign Corporation or Passive Foreign Investment Company his AGI (Adjusted gross income) may require additional adjustments.
Nonresident Aliens are not subject to Net Investment Income tax, but as a U.S citizen or green card holder, you are.
Following types of income qualify as Net Investment Income:
Stocks or other investments that pay regular dividends
Stocks or other investments through which you earn long term or short term capital gains
Interest-bearing bank accounts
Non-qualified annuities
Rental property
Investment property
Royalty payments
Income from a business that has primary source of revenue from trading financial assets
Following types of income do not qualify as Net Investment Income:
Salaries and wages
Self-employment income
Alimony
Unemployment compensation
Tax-exempt interest
Supplemental security income
Social security disability income
Sale of primary residenr or personal vehicle
IRS qualifies retirement plans
Dividends earned from Alaska Permanent Fund
Non-passive business income
Reporting Net Investment Income
Use form 8960 to compute your Net Investment Income. Individuals will report their Net Investment Income on Form 1040. Estates and trust will report their Net investment income on Form 1041.
Foreign Tax Credits
You cannot use foreign tax credits to reduce your NIIT liability. However, if you take foreign income taxes as an income tax deduction instead of foreign tax credit, you may be able to deduct some or all deduction amount against your NIIT.
To know more Visit The Accounting and Tax or call 416-283-8774
