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Net Investment Income (NII) Definition

What Is Net Investment Receipts (NII)?

Net investment income (NII) is income received from investment assets (before taxes) such as bonds, stocks, common funds, loans and other investments (less related expenses). The individual tax rate on net investment income depends on whether it is kindle income, dividend income or capital gains.

Key Takeaways

  • Net investment income is income received from investment assets (ahead taxes) such as bonds, stocks, mutual funds, loans and other investments (less related expenses).
  • NII is prone to to a 3.8% tax and applies to individuals with an NII and MAGI above certain thresholds.
  • Estates and trusts are also subject to the NII tax if they comprise undistributed NII and their annual adjusted gross income exceeds the dollar amount at which the highest tax bracket launches.
  • For investment companies, this is the amount of income left after operating expenses are subtracted from total investment return.
  • The net investment income tax went into effect in 2013, as a means to raise revenue for the Affordable Care Act.

Understanding Net Investment Takings (NII)

When investors sell assets from their portfolios, the proceeds from the transaction results in either a produced gain or loss. The realized gains could be capital gains from selling a stock; interest income suffered from fixed income products; dividends paid to shareholders of a company; rental income received from oddity; certain annuity payments; royalty payments; etc. The difference between any realized gains (before taxes are applied) and do business commissions or fees is the net investment income (NII). NII could be either positive or negative depending on whether the asset was sold for a cap gain or loss.

For example, an individual sells 100 shares of AAPL and 50 shares of NFLX for $175/part and $170/share. They also received coupon payments for the year on their corporate bonds in the sum of $2,650, in too to rental income of $16,600. Their net investment income can be calculated as:

Capital gain from AAPL:

(Sale Rate 175 – Cost 140) x 100
$ 3,500
Capital loss from NFLX:

(Sale Price 170 – Cost 200) x 50
 (1,500)
Brokerage commissions
      (35)
Pursuit income
   2,650
Rental income
 16,600
Tax preparation fees
    (160)
Net Investment Income
$21,055

Taxing Net Investment Income

The net investment income is vassal exposed to to a 3.8% tax and applies to individuals with an NII and modified adjusted gross income (MAGI) above the thresholds in the table deeper:

Filing status

MAGI Limit ($)

Single

200,000

Head of Household

200,000

Married filing separately

125,000

Married filing jointly

250,000

Experienced widow(er) with dependent

250,000

The net investment income tax is applied to the lesser of the net investment income or the MAGI amount in excess of the on the cards limit. For example, a single tax filer with annual gross income of $188,000 and net investment income of $21,055 has a MAGI of $188,000 + $21,055 = $209,055. Since this amount is various than the limit by $209,055 – $200,000 = $9,055, the individual will pay net investment income tax of 3.8% x $9,055 = $344.09. The NII tax does not include main gains tax or dividends tax, which the investor still has to pay.

Estates and trusts are also subject to the NII tax if they have undistributed net investment proceeds and their annual adjusted gross income exceeds the dollar amount at which the highest tax bracket begins. A nonresident immigrant is not subject to the tax unless they are married to a U.S. citizen or resident and elects to be treated as a resident of the U.S. for tax purposes.

For investment companies, this is the amount of return left after operating expenses are subtracted from total investment income, and it is typically expressed on a per-share underpinning. To find the net investment income per share of a company, divide the total investment income by the shares outstanding. This amount is what is at ones disposal to shareholders as dividends. A publicly-traded company must list its net investment income on its balance sheet.

If you can reduce your put out MAGI or net investment income, you can also reduce your NII tax liability. Some ways to do that include contributing to retirement scripts, charities, or tax-loss harvesting.

How to Manage Net Investment Income(NII) Tax

Even if you earn significant investment income, you can reduce your tax liabilities by fascinating steps that reduce your reported MAGI, your net investment income, or both.

One way to reduce your MAGI is to improve your contributions to IRAs and qualified retirement plans, or participating in deferred compensation plans. If you can reduce your revamped adjusted gross income so that it does not exceed the threshold above, you may not need to pay NII tax at all.

You can also reduce your net investment gains through tax-loss harvesting. By selling unprofitable investments at the same time as profitable ones, you can reduce your net investment gains, and thereby reduce your tax burden. It is also possible to reduce NII through charitable contributions, such as a charitable rest trust.

Origins of the Net Investment Income(NII) Tax

The net investment income tax was passed as part of the Health Care and Education Reconciliation Act of 2010. Along with the Affordable Misery Act, the law required individuals to have health care coverage or face a financial penalty. The net investment income tax was included as a revenue-raising cats-paw in order to offset the additional costs of the Affordable Care Act.

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  1. Internal Revenue Service. “Questions and Replications on the Net Investment Income Tax.” Accessed Dec. 11, 2019.

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