what is Net Investment Income

The Net Investment Income Tax (NIIT) is a 3.8% tax on investment earnings that applies to individuals, estates, and trusts when their modified adjusted gross income (MAGI) exceeds certain thresholds. Here's a detailed analysis of the NIIT:

1. **Who is Subject to the NIIT**:
- Individuals: If an individual's MAGI exceeds $250,000 for married filing jointly or qualifying surviving spouse, $125,000 for married filing separately, or $200,000 for single or head of household, they are subject to the NIIT on their net investment income.
- Estates and Trusts: Estates and trusts are also subject to the NIIT if they have undistributed net investment income and their AGI exceeds the threshold of $15,200 for the 2024 tax year.
2. **What is Included in Net Investment Income**:
- Net investment income includes interest, dividends, capital gains, rental and royalty income, and non-qualified annuities.
- It does not include wages, unemployment compensation, Social Security Benefits, alimony, or most self-employment income.
- Gains from the sale of a personal residence are also excluded from gross income for regular income tax purposes and are not subject to the NIIT.
3. **How is the NIIT Calculated**:
- The NIIT is calculated as 3.8% on the lesser of the net investment income or the amount by which the MAGI exceeds the statutory threshold amount based on the filing status.
- For example, if an individual earns $100,000 in net investment income and their MAGI exceeds the NIIT limit by $150,000, they would owe the tax on the lower amount of $100,000.
4. **Filing Requirements**:
- Individuals, estates, and trusts must file Form 8960 to report the NIIT.
5. **Penalties**:
- If an individual has too little withholding or fails to pay enough quarterly estimated taxes to cover the NIIT, they may be subject to an estimated tax penalty.

In conclusion, the NIIT is a tax on investment earnings that is applicable to higher-income individuals, estates, and trusts. It is important to understand what is included and excluded from net investment income and to file the necessary forms to avoid penalties.