What Is Net Investment Income (NII)?
Net Investment Income (NII) is the total income derived from assets like stocks, bonds, and mutual funds, after deducting associated expenses, as per tax regulations.
NII encompasses interest income, dividend income, and capital gains, with the potential taxability determined by the individual’s Modified Adjusted Gross Income (MAGI).
Key Takeaways
- Net investment income comprises earnings from assets pre-tax, including bonds, stocks, mutual funds, loans, and other investments net of related expenses.
- NII is subject to a 3.8% tax for individuals with NII and MAGI surpassing specific thresholds.
- Estates and trusts face the NII tax if their undistributed NII and annual adjusted gross income exceed the commencement of the highest tax bracket.
- For investment firms, NII signifies income remaining post deduction of operating expenses from total investment income.
- The NII tax was enforced in 2013 to finance the Affordable Care Act, seeking revenue generation.
Understanding Net Investment Income (NII)
Income refers to any earnings from labor, product sales, services, or investments. When assets are sold, either a gain or loss is realized. Gains could manifest in:
- Stock sale capital gains
- Interest income from fixed-income products
- Dividends distributed to company shareholders
- Property rental income
- Specific annuity payments
- Royalty payments
Realized gains, less costs like trading commissions, contribute to NII before taxes, while earnings like wages are not considered.
Since Jan. 1, 2013, NII exceeding specific thresholds is taxable. Termed as the net investment income tax, it was enacted alongside the Health Care and Education Reconciliation Act of 2010. The 3.8% rate applies to “specific net investment income of individuals, estates, and trusts exceeding statutory threshold amounts.”
Net investment income varies based on asset sale profits or losses, with tax implications accordingly.
What Counts as NII?
The table delineates what constitutes and excludes net investment income.
| What Counts | What Doesn’t Count |
|---|---|
| Interest income | Wages and salaries |
| Capital gains | Alimony |
| Dividends | Social Security benefits |
| Passive investment income | Unemployment benefits |
| Rental income | Qualified distributions from 401(k)s or IRAs |
| Royalty income | Life insurance payouts |
| Income from active business investments | |
| Proceeds from tax-exempt organizations and transactions |
Who Pays the NII Tax?
Individuals, estates, and trusts are subject to a 3.8% tax on net investment income exceeding certain income thresholds.
Individuals
Individuals with NII exceeding particular Modified Adjusted Gross Income thresholds incur the tax.
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