Net investment income tax

The net investment income tax, which applies for the first time from Jan 1 2013, imposes a rate of 3.8 percent to certain net investment income of individual estate and trusts that have income over certain amounts. The US/UK treaty, does not give US persons residing outside of the US protection against this amount, nor does a foreign tax credit apply.

Individuals will owe this tax if they have Net Investment Income and also have modified adjusted gross income over the following thresholds:

Filing Status Threshold Amount
Married filing jointly $250,000
Married filing separately $125,000
Single $200,000
Head of household (with qualifying person) $200,000
Qualifying widow(er) with dependent child $250,000

Investment income and gains include but are 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
  • capital gains from stocks bonds and mutual funds
  • capital gain distributions from mutual funds
  • gain from the sale of investment real-estate
  • gains from the sale of interests in partnerships and s corporations

You are allowed certain deductions against investment income in arriving at your Net Investment income subject to the 3.8% tax. As a general rule, such deductions must be “properly allocable” to items of gross investment income. Examples include, investment interest expense, investment advisory and brokerage fees, expenses related to rental and royalty income.

If you would like further advice regarding the Net Investment Income Tax or indeed your tax affairs in general please contact us.