More People Are Paying This Tax On Investment Income Each Year: Kiplinger Tax Letter
The number of returns reporting the net investment income tax has more than doubled and revenue from the tax has grown by $38 billion over the past decade.
Getting the right tax advice and tips is vital in the complex tax world we live in. The Kiplinger Tax Letter helps you stay right on the money with the latest news and forecasts, with insight from our highly experienced team (Get a free issue of The Kiplinger Tax Letter or subscribe). You can only get the full array of advice by subscribing to the Tax Letter, but we will regularly feature snippets from it online, and here is one of those samples…
More people each year pay this pesky tax: The 3.8% surtax on net investment income (NII). The tax, which was enacted as part of Obamacare, applies to single filers with modified adjusted gross incomes (AGIs) above $200,000 and to joint filers with modified AGIs over $250,000. The income threshold is $125,000 for married people filing separately. Here, modified AGI is AGI plus tax-free foreign-earned income. The tax is due on the smaller of NII, or the excess of modified AGI over the set income thresholds. NII includes dividends, capital gains, taxable interest, annuities, royalties, passive rents and certain income from passive activities. Distributions from 401(k)s, IRAs, pensions, and the like are not investment income. Nor is tax-exempt interest from municipal bonds. Investment expenses reduce the income subject to the surtax. Trusts and estates can also be hit with the surtax if their 2023 AGI exceeds $14,450 and they have undistributed net investment income.
Unlike many of the federal income tax breaks and income phaseout levels, the individual income levels for the 3.8% NII tax aren’t indexed to inflation each year. The $125,000, $200,000 and $250,000 modified AGI thresholds have stayed stagnant since the tax first took effect in 2013, despite the high growth in wages, income, and gains from sales of real estate and other investment assets. Partly because of this, the number of 1040 returns reporting the NII surtax has more than doubled over the past decade, from 3 million for 2013 returns to 7 million for 2022 returns. Additionally, revenue from the tax has grown by $38 billion during the same period.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
GOP and Democratic lawmakers have proposed changes to the 3.8% tax. Not surprisingly, Republicans want to limit the hit of the NII surtax. For example, a GOP Senate bill proposes to raise the $250,000 modified AGI threshold for joint filers to $400,000, so that it is exactly double that of single filers. That bill would also index the three modified AGI thresholds to inflation each year.
President Biden takes a different approach. He wants to expand the NII tax. First, he would hike the rate to 5% for people with over $400,000 of income. More specifically, the tax would rise by 1.2 percentage points on the lesser of NII or modified AGI over $400,000. For other taxpayers, the rate would stay at 3.8%.
Second, Biden has proposed that the surtax cover more business income. Currently, income from a passive activity is NII and is subject to the 3.8% surtax for taxpayers who don’t materially participate in the activity, even if the income is from a business. This rule applies to income from activities engaged in directly and to pass-through income from LLCs, limited partnerships and S corporations. Income from a person’s share of business profits from a pass-through entity in which one materially participates is exempt from the 3.8% tax and the 0.9% surtax on earned income of upper-incomers. Biden would impose the NII tax on income derived from pass-through entities in which an individual materially participates. The change would affect joint filers with incomes over $500,000 and $400,000 for singles.
Third, Biden aims to use revenues from the NII tax to shore up Medicare, to stave off the insolvency of Medicare’s Hospital Insurance Fund. Believe it or not, money from the NII tax, commonly referred to as a “Medicare surtax” has gone into general revenues for years.
This first appeared in The Kiplinger Tax Letter. It helps you navigate the complex world of tax by keeping you up-to-date on new and pending changes in tax laws, providing tips to lower your business and personal taxes, and forecasting what the White House and Congress might do with taxes. Get a free issue of The Kiplinger Tax Letter or subscribe.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Joy is an experienced CPA and tax attorney with an L.L.M. in Taxation from New York University School of Law. After many years working for big law and accounting firms, Joy saw the light and now puts her education, legal experience and in-depth knowledge of federal tax law to use writing for Kiplinger. She writes and edits The Kiplinger Tax Letter and contributes federal tax and retirement stories to kiplinger.com and Kiplinger’s Retirement Report. Her articles have been picked up by the Washington Post and other media outlets. Joy has also appeared as a tax expert in newspapers, on television and on radio discussing federal tax developments.
-
Visa Is the Worst Dow Stock Wednesday. Here's Why
Visa stock is down sharply Wednesday after the credit card company came up short of revenue expectations for its fiscal Q3.
By Joey Solitro Published
-
Another Analyst Moves to the Sidelines on Tesla Stock After Earnings
Tesla stock is spiraling Wednesday after the EV maker's big earnings miss and Wall Street has been quick to weigh in. Here's what you need to know.
By Joey Solitro Published
-
Landlord With Rental Income? See if You Qualify for a 20% Tax Break
The Tax Letter Many landlords are eligible to take the 20% tax deduction for qualified business income
By Joy Taylor Published
-
Five Ways to Fund Medicare Part A
The Tax Letter Higher taxes can help stave off the projected 2036 insolvency of Medicare's Hospital Insurance trust fund.
By Joy Taylor Published
-
QCDs Are a Tax-Smart Way for Retirees To Donate to Charity
The Tax Letter With QCDs, retirees can save on taxes by making donations from their IRAs directly to charity. Here's what you need to know about qualified charitable distributions.
By Joy Taylor Published
-
The IRS is Ramping up Tax Audits
The Tax Letter Wealthy individuals, large corporations and partnerships are all audit targets, thanks in large part to the IRS's multi-billion dollar windfall.
By Joy Taylor Published
-
Medicare Tax: Five Things Every Worker Needs to Know
Payroll Taxes It's important to know how Medicare tax works.
By Kelley R. Taylor Last updated
-
Biden's Plans to Impose an Income Tax on Death
The Tax Letter The president has proposed a new taxing regime that would make death an income tax realization event for wealthy decedents.
By Joy Taylor Last updated
-
Key Tax Provisions That Are Expiring After 2025
The Tax Letter Unless Congress decides to act, lots of tax changes will take effect in 2026, including higher tax rates and lower standard deductions.
By Joy Taylor Published
-
Knowing How to Compute Tax Basis in Your Home Can Save You Money
The Tax Letter Whether you're selling or buying a home, you'll want to know how to compute tax basis. It could save you on taxes when you sell.
By Joy Taylor Published