Beginning in 2013, taxpayers that meet certain investment income thresholds will be subject to an additional 3.8 percent surtax, enacted as part of the Health Care and Education Reconciliation Act of 2010. Also known as the Medicare surtax, it will apply to all taxpayers whose income exceeds a certain threshold amount. This new surtax will, in essence, raise the marginal income tax rate for affected taxpayers. The following are some frequently asked questions and answers on the new net investment income tax.

The net investment income tax (NIIT) went into effect on Jan. 1, 2013. It affects income tax returns of individuals, estates and trusts for their first tax year beginning on (or after) Jan. 1, 2013. It does not affect income tax returns for the 2012 taxable year filed in 2013.

You will owe the tax if you have net investment income (NII) AND also have modified adjusted gross income (AGI) over the following thresholds:  

Tax Filing Status

Threshold Amount

Married filing jointly


Married filing separately




Head of household (with qualifying person)


Qualifying widow(er) with dependent child


If you are exempt from Medicare taxes, you still may be subject to the net investment income tax if you have NII and have modified AGI above the applicable thresholds.

In general, investment income includes, but is not limited to:

  • Interest
  • Dividends
  • Capital gains
  • Rental and royalty income
  • Non-qualified annuities
  • Income from businesses involved in trading of financial instruments or commodities
  • Businesses that are passive activities to the taxpayer

In order to arrive at NII, gross investment income is reduced by deductions that are properly allocable. Examples of properly allocable deductions include:

  • Investment interest expense
  • Investment advisory and brokerage fees
  • Expenses related to rental and royalty income
  • State and local income taxes properly allocable to items included in NII

The NIIT is 3.8% on the lesser of the amount that your modified AGI exceeds the threshold or your NII.

This tax can be quite complex and is subject to estimated tax provisions. Therefore, if you are expected to be subject to the tax in 2013 or future years, then your income tax withholdings or estimated payments should be adjusted to account for the tax increase in order to avoid underpayment penalties.

November 22, 2013 12:00 am