In last week’s blog, the first in a two-part series, we discussed the new Net Investment Income Tax (NIIT) which became effective on January 1, 2013 and must be paid by those affected this April. As promised, in this post we look at the specific steps involved in its calculation, and consider a few examples to illustrate how it works.
Steps to Calculate the NIIT
Here are the steps involved in the calculating this tax. It should be noted that step four can be found in last week’s post.
Step 1) Determine total Investment Income
Step 2) Determine investment expenses allocable to Investment Income
Step 3) Determine Net Investment Income (Subtract Step 2 from Step 1)
Step 4) Determine Modified Adjusted Gross Income (MAGI)
Step 5) Select applicable threshold
Step 6) Determine the amount of MAGI which exceeds the applicable threshold (Subtract Step 5 from Step 4)
Step 7) Determine the lesser of Step 3 and Step 6
Step 6) Multiply Step 7 by 3.8%
That’s the basic formula. If you’d like more details, refer to IRS Form 8960 and the corresponding instructions.
Thresholds and Examples
I’ve included the applicable thresholds from last week’s post for your convenience. As mentioned, they are not indexed for inflation.
Consider a single filer with wages of $150,000 and dividends plus capital gains equal to $35,000. His MAGI is $185,000. Since this is less than the threshold for a single filer ($200,000), he is not subject to the NIIT.Example One