ACA Net Investment Income Tax

The 2012 Patient Protection and Affordable Care Act (ACA) introduced the 3.8% Net Investment Income Tax (NIT) on upper-income individuals and trusts.

Net Investment Income Tax

New taxes were ushered in to finance the law. The Net Investment Income Tax (NIT) (originally referred to as the (ACA 3.8% Medicare surtax on unearned income) affected upper-income taxpayers as of Jan. 1, 2013. It only applies to individuals with net investment income (NII) and modified adjusted gross income (AGI) exceeding $200,000 single, $250,000 married filing jointly, or $125,000 married filing separately. These thresholds are not indexed for inflation. (Modified AGI means U.S. residents abroad must add back any foreign earned income exclusion reported on Form 2555.) The tax also applies to irrevocable trusts (and estates) on the undistributed NII more than the dollar amount at which the highest tax bracket for trusts begins. TCJA did not suspend or modify ACA’s NIT.

Net Investment Income

Notice the terms “investment income” and “unearned income.” People who receive earned income from a job pay Social Security tax (on the social security base amount) and Medicare on their wages or self-employment income. In general, unearned income includes interest, dividends, rents, royalties, capital gains, income and loss from companies in which you are passive, and income and loss from pass-through investment and trading companies. NIT subjects this type of income to Medicare taxes, too — albeit at upper-income brackets only.

NII requires the segregation of different types of unearned income into three different buckets. (Take a look at Form 8960 and the final IRS regulations.)

NII buckets include the following:

  • Portfolio income (includes interest, dividends, and annuity distributions), royalties (net of oil and gas depletion expenses), and rents (net of depreciation);
  • Passive activity income and loss from pass-through entities and investment and trading companies;
  • Capital gains net of capital losses.

Excerpt from Green’s Trader Tax Guide Chapter 15, ACA Net Investment Income Tax.