Net Investment Tax Regulations Are Out

The new Net Investment Income Tax regs are out, and they cast a wide upper income net.

The Internal Revenue Service’s final regulations on net investment tax income – all 400 pages of them – were released on Nov. 27. Overall, the net investment income regulations concern the 3.8% investment tax on those in a higher tax bracket, which was put in place to help pay for Obamacare. Accounting professionals like us are, at this moment, going through the regulations paragraph by paragraph and line-by-line to understand how, what, when, where, and why the paragraphs and sub-paragraphs will affect our clients.

Essentially these regulations deal with individuals, estates and trusts with income above certain thresholds. Here’s a table the IRS issued that notes the thresholds for individuals and married couples.

The IRS notes that even if you’re exempt from paying Medicare taxes, the Net Investment Income Tax may still affect you if have net investment income and adjusted gross income exceeding the above-listed numbers.

Generally included in the IRS’s definition of net investment income are: “interest; dividends; capital gains; rental and royalty income; non-qualified annuities; income from businesses involved in trading of financial instruments or commodities; and businesses that are passive activities to the taxpayer (within the meaning of section 469).”

Here are the bulk of income sources the IRS doesn’t include as net investment income: wages; unemployment compensation; operating income from a non-passive business; Social Security Benefits; alimony; tax-exempt interest;  and self-employment income,

The IRS explained types of gains “taken into account” in determining net investment income:

• Gains from the sale of stocks, bonds, and mutual funds.
• Capital gain distributions from mutual funds.
• Gain from the sale of investment real estate (including gain from the sale of a second home that is not a primary residence)
• Gains from the sale of interests in partnerships and S corporations (in some instances the partner or shareholder was a passive owner). See section 1.1411-7 of the 2013 proposed regulations.

Simply put, the regs can’t be explained in just one blog post. However, business media giant Forbes has produced a multi-installment online look at key areas of the regulations that are worthy of examining. Forbes also created an in-depth question-and-answer piece.

If you’d like a more “official” Q&A, check out the IRS version.

A suggestion: if you’re affected by this tax and these regulations, don’t try to figure them out for yourself. Chances are you’ll wind up making a mistake that costs you money. Talk you your accounting professional about your specific needs.