What items are not subject to net investment income tax? (2024)

What items are not subject to net investment income tax?

Net investment income generally does not include wages, unemployment compensation, Social Security Benefits, alimony, and most self-employment income. Additionally, net investment income does not include any gain on the sale of a personal residence that is excluded from gross income for regular income tax purposes.

What is not subject to net investment income tax?

It doesn't include:

Unemployment pay. Qualified retirement plan withdrawals (like those from a 401(k) or IRA) Payouts from a traditional defined benefit pension plan or retirement plan annuity. Payouts from a deferred compensation plan from a state, local government, or tax-exempt organization.

What investment is not subject to income taxes?

Types of Tax-Exempt Bonds

There are two types of tax-exempt municipal bonds, classified by how the money borrowed is repaid: general obligation (GO) bonds and revenue bonds. The tax-exempt sector includes bonds, notes, leases, bond funds, mutual funds, trusts, and life insurance, among other investment vehicles.

How to avoid net investment tax?

Are passive activities subject to net investment income tax?

The NIIT applies to income from a trade or business that is (1) a passive activity, as determined under § 469, of the taxpayer; or (2) trading in financial instruments or commodities, as determined under § 475(e)(2). The NIIT doesn't apply to wages, unemployment compensation, or income from a nonpassive business.

What income is subject to NIIT?

Overview of the NIIT

The NIIT is equal to 3.8% of the net investment income of individuals, estates, and certain trusts. Net investment income includes interest, dividends, annuities, royalties, certain rents, and certain other passive business income not subject to the corporate tax.

Is sale of second home subject to NIit?

If the home is a nonprincipal residence (a vacation home, for example) or you don't meet the two-year requirement, the entire gain will be subject to capital gains taxes and, depending on your MAGI, NIIT.

Is sale of rental property subject to NIIT?

The NIIT is a 3.8% income tax on unearned income (income other than from a job or business). It was implemented with the passing of Obamacare. Net rental income is subject to the NIIT and so is the capital gain on the sale of rental property.

Is goodwill subject to NIIT?

Because gain from the sale of personal goodwill is income from a personally developed intangible asset that is not passive income, and, generally, income from personal service activities is not passive, the gain from the sale of personal goodwill should not be subject to the net investment income tax.

How is NIIT tax calculated?

Accordingly, the net investment income tax (NIIT) will take a 3.8% bite out of a portion of your investment earnings. There are, however, a number of restrictions on what the NIIT does and doesn't apply to. Take a look through our detailed guide below for more insight.

What are the exclusions for NIIT?

Wages, self-employment income, unemployment compensation, business income from nonpassive sources, Social Security benefits, tax-exempt interest, and qualified pension, annuity, and individual retirement account distributions are excluded when calculating the net investment income tax.

Do I need to pay net investment income tax?

The net investment income tax (NIIT) is a 3.8% tax that kicks in if you have investment income and your income exceeds $200,000 for single filers, $250,000 for those married filing jointly or $125,000 for those married filing separately.

Does everyone pay net investment income tax?

Not everyone will need to pay the NIIT, and only those above certain income thresholds will be subject to it. The IRS statutory income thresholds are as follows: Married filing jointly — $250,000. Married filing separately — $125,000.

Are Roth conversions subject to NIIT?

Although distributions from a traditional IRA aren't subject to NIIT, they do increase your modified adjusted gross income, which can trigger or increase the NIIT. This is true for the conversion to a Roth IRA. Distributions from Roth IRAs are excluded from gross income, so they aren't subject to NIIT.

Are S Corp distributions subject to NIit?

S corporations are not subject to the net investment income (NII) tax, but S corporation shareholders may be subject to the tax on income items related to their investments in the corporation.

Does NIIT apply to IRA distributions?

This net investment income tax also applies to certain trusts and estates. It does not apply to corporations and other “active” businesses. It does not apply to trusts associated with IRAs or pension plans.

Is lottery subject to NIIT?

On a positive note, NII does not include tax-exempt bond interest, veterans' and social security benefits, excluded gain from the sale of a principal residence, life insurance proceeds received by reason of an insured's death, lottery winnings, and the tax-free inside buildup of the cash surrender value of life ...

At what income does the 3.8 surtax kick in?

The threshold is $250,000 for joint filers, $125,000 for married filing separately, and $200,000 for all other filers. Net investment income includes the following items of income reduced by applicable expenses: interest, dividends, capital gains, annuities, royalties, and passive rental and business income.

Is depreciation recapture subject to NIIT?

While depreciation recapture is taxed purely based on the difference between the tax basis after claimed depreciation, NIIT is taxed on the entire gain of a sale.

What income is excluded from net investment income?

Net investment income generally does not include wages, unemployment compensation, Social Security Benefits, alimony, and most self-employment income. Additionally, net investment income does not include any gain on the sale of a personal residence that is excluded from gross income for regular income tax purposes.

Do you pay NIIT on long term capital gains?

Long-term capital gains and the NIIT:

In practice, the NIIT may not only apply to those in the highest capital gains tax rate bracket creating a liability of 23.8%, but it could also apply to taxpayers in the high end of the middle bracket (15%) turning their potential liability into 18.8%.

Is NIIT tax on capital gains?

The Net Investment Income Tax is imposed by section 1411 of the Internal Revenue Code. The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts.

Is rental income considered investment income?

Rental ownership is an investment, not a business, if you do it to earn a profit, but don't work at it regularly and continuously—either by yourself or with the help of a manager, agent, or others.

Are Schedule E rentals subject to NIIT?

Short-term rentals reported on Schedule C of your Form 1040 trigger the self-employment tax but are exempt from the NIIT if you materially participate in the rentals. Short-term rentals reported on Schedule E can qualify as businesses, and if so, they escape the NIIT if you materially participate.

Is qualified small business stock subject to NIIT?

No net investment income tax (NIIT): Proceeds from the sale of QSBS are not subject to the NIIT, which is an additional 3.8% tax on certain types of investment income.