Net Investment Income Tax
November 28, 2012

The Supreme Court has upheld the health insurance mandate contained in the 2010 Patient Protection and Affordable Care Act (Act). Part of the Act imposes a 3.8% surtax on investment income beginning in 2013. The surtax will be calculated and included on 2013 individual income tax returns which will be due in April 2014.

The tax applies to the LESSER of investment income or the excess of modified adjusted gross income (MAGI) over $200,000 (singles) or $250,000 (married couples filing jointly).
Investment income includes:

  • Interest
  • Dividends
  • Capital gains
  • Annuities
  • Rents
  • Royalties
  • Income from any passive trade or business

Investment income does not include:

  • Active trade and/or business income
  • Any of the above sources of income (e.g. interest, dividends, capital gains etc.) to the extent it is derived from an active trade or business
  • Qualified retirement plan distributions (IRA, 401k, etc.)
  • Tax-exempt interest

Example 1: 

Ed & Jen are a married couple filing ajoint tax return. Their income consists of:
Wages: $237,000
Interest (taxable): 1,700
Dividends: 3,500
Net Capital Gains: 32,000
Net Rental Income:10,500
Total MAGI: 284,700
(a) Investment Income: 47,700
(b) Excess MAGI over
$250,000: 34,700
Lesser of (a) or (b): 34,700
Surtax Amount (3.8%):

Example 2:
Grant is a single taxpayer and has the following income:
Retirement Plan Distributions: $215,000
Dividends: 45,000
Net Rental Income: 13,500
Total MAGI: 273,500
(a) Investment Income: 58,500
(b) Excess MAGI over
$200,000: 73,500
Lesser of (a) or (b): 58,500
Surtax Amount (3.8%):