Friday, February 7, 2014

CLIENT FOCUS - Examples for 3.8% Net Investment Income Tax


Clients of the firm will soon be receiving copies of our Client Focus newsletter that goes out several times per year. One of the articles in this installment of the Client Focus teased readers with some examples of application of the 3.8% Net Investment Income Tax.  As promised, here are a couple simplified examples of application of the new tax:

Example 1:  A married couple has salary income of $220,000 and investment income of $48,000.  Since their MAGI is $268,000 (and exceeds the $250,000 limit for married individuals), they will be subject to the NIIT.  They are taxed 3.8% on the lesser of: 1) $48,000, their investment income, or 2) $18,000, the amount by which their MAGI exceeds the $250,000 threshold for married individuals.  Their additional tax would be $684  ($18,000 x 0.038).

 Example 2:  George, a single person has salary income of $175,000 and interest and dividend income of $20,000.  MAGI would be $195,000 so George would not be subject to the 3.8% NIIT.  However, let’s assume that George retired at the end of this year and at retirement was required to exercise $30,000 worth of deferred compensation stock options.  This $30,000 is not part of net investment income, but does increase George’s MAGI to $225,000 (which exceeds the $200,000 limit for single individuals).  The 3.8% tax will apply to George’s $20,000 of investment income and result in $760 of additional tax (which is less than the $25,000 of excess MAGI).

If you didn’t get a copy of our Client Focus newsletter and you would like to read it please click here (warning: large file size).

Jason C. Walker

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