Congressional Democrats Aim to Close the 3.8% NIIT "Loophole" for Passthrough Businesses

A recent proposal by Congressional Democrats would seek to close the "loophole" that allows passthrough business entities to avoid paying the 3.8% net investment income tax. Under current law, income from a trade or business in which the taxpayer actively participates is not subject to the 3.8% investment income tax, which was added to the Internal Revenue Code under the Affordable Care Act. The tax is currently imposed on the lesser of the taxpayer's net investment income or the excess of the taxpayer's MAGI over the threshold amount ($200,000 for single returns and $250,000 for joint returns). Under the proposal, taxpayers would only have to pay the 3.8% tax on earnings from their passthrough business income if their annual income exceeds $400,000 (single taxpayers) or $500,000 (joint returns). The revenue would be used to shore up the Medicare fund. For more information on the net investment income tax, visit Tax Facts Online. : Q 8635