The Net Investment Income Tax (NIIT) and the Affordable Care Act
The Affordable Care Act was passed by Congress and then signed into law by the President on March 23, 2010. Two years later, the Supreme Court rendered a final decision on June 28, 2012, to uphold parts of the health care law under Congress’ Taxing Power reserved under the US Constitution, Article 1, § 8, which provides that, “The Congress shall have the Power to lay and collect Taxes…”. This characterization by the US Supreme Court that the Affordable Care Act was indeed a “tax” was by no means a misstep.
What is the Net Investment Income Tax?
One of the many taxes imposed by the Affordable Care Act is the 3.8% Net Investment Income Tax.
Under the Internal Revenue Code, Section 1411, the Net Investment Income Tax or NIIT, applies to certain net investment income of individuals, estates and trust that have income above the statutory threshold. This tax went into effect on January 1, 2013 and will affect income tax returns of individuals, estate and trusts.
Individual taxpayers should be aware of this NIIT tax, and how it applies to an individual, or married persons having modified adjusted gross income over the threshold amounts (e.g., such as $250,000 for a married person filing jointly).
However, wages, unemployment compensation; operating income from a nonpassive business, Social Security benefits, alimony, tax-exempt interest, self-employment income, and distributions from certain tax Qualified Plans (i.e., 401(a), 403(a) and (b), 457(b), etc.) will not be considered income subject to the NIIT.
Will Estate and Trusts be subject to the NIIT?
Yes, unfortunately. Estates and Trusts will be liable for the NIIT if they have undistributed Net Investment Income and also have adjusted gross income over the dollar amount at which the highest tax bracket for estates and trusts begins for the taxable year.
But, certain types of trusts (including many of those used for estate planning) will NOT be subject to the NIIT. These include:
(1) Charitable trusts, qualified retirement plan trusts exempt under IRC section 501
(2) Grantor Trusts (living trusts under IRC §§671-679)
(3) Trusts that are not classified as “trusts” for federal income tax purposes (e.g., REITs and common trust funds); and
(4) Perpetual care trusts
What income is taxable?
The most important question perhaps to ask is what types of income are subject to the NIIT. The answers are:
- Gains from the sale of stocks, bonds, and mutual funds
- Capital gain distributions from mutual funds
- Gains from the sale of investment real estate
- Gains from the sale of interests in partnerships and S corporations.
As the 2019 tax season is upon us, it is imperative for you to discuss the tax implications of this tax with your certified public accountant or enrolled agent. Remember, the “Net” income investment tax is based on a calculation and formula which first starts by looking at your gross income. No doubt, this tax, like many others, will affect many people.
IMPORTANT: Neither this blog article nor any information on this website shall be construed as the offering or rendering of any legal advice and does not establish an attorney-client relationship between the reader and Mesch Clark Rothschild (“MCR”) or any attorney at MCR. You should consult with an attorney if you have a specific question regarding your legal issues.