By: Jennifer Hatcher, CPA & Sally Wisnoski, Principal CPA

The NII surtax, for tax years beginning after December 31st, 2012, on individuals equals 3.8% of the lesser of: 

  • Net investment income for the tax year, or

  • The excess, if any of: (a) the individual’s modified adjusted gross income for the tax year, over the threshold amount.

The threshold amounts are as follows:

  1. Single- $200,000

  2. Married filing Joint Return- $250,000

  3. Married filing Separate Return $125,000

  4. Head of Household (with qualifying child)- $200,000

  5. Qualifying Widow(er) with dependent child- $200,000.

  1. The impact of these regulations will affect many different areas. Special rules will apply to areas such as estates and trusts, which are subject to the NII tax on the lesser of undistributed NII or the excess of adjusted gross income over the dollar amount at which the highest tax bracket begins. So for 2013 the bracket begins at $11,950. For 2014, it starts at $12,150. Estates and trusts should consider distributing income to beneficiaries to possibly avoid the new 3.8% NII tax.

  2. The regulations define NII through three categories; they include: Category one- gross income from interest, dividends, annuities, royalties, and rents, other than such income which is derived in the ordinary course of a trade or business. In order to qualify for the ordinary course of a trade or business exception, two tests must be met; the item must be derived in a trade or business and the item must be derived in the ordinary course of such trade or business. Category two- other income derived from a trade or business (ie: a passive activity with respect to the taxpayer or income by a financial trader). Category three- net gain attributable to the disposition of property, other than property held in a trade or business. The final regulations retain the rule that net gain may take into account capital losses carried over from the prior years. 

  3. In computing NII, the sum of income within the above categories is reduced by deductions that are allowed under the regulations. These regulations are properly allocable to such gross income or net gains. Investment interest expense, investment expenses directly connected with the production of the investment income, and the state, local, and foreign incomes taxes.Net Investment Income Tax

  4. Additionally, the IRS proposed a different approach to a much-criticized deemed sale rule for dispositions of active interests in partnerships and S corporations.

  5. The clarifications of these regulations cover income, estimated taxes, real estate rental activities, trusts and estates, along with many other provisions that are not listed. 

    Contact Us 

    For more information on these provisions or questions regarding how these provisions apply to you please contact one of our experienced tax accountants.CCH has issued a new Tax Briefing: IRS Clarifies NII Tax / Additional Medicare Tax in Final Regs, providing insight on the recently released 3.8% final Net Investment Income (NII) tax and 0.9% Additional Medicare Tax regulations. The regulations, created from the Health Care and Education Reconciliation Act, are intended to help fund health care reform. These much-anticipated final regulations come nearly one year after the IRS issued proposed reliance regulations.

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