Calculate net investment income tax

There are dues that must be paid by legitimate investors in all parts of the world. Basically, these dues are known as taxes. There are different types of taxes, some of which are

  • Dreaded income tax

  • Corporate tax

  • Wealth tax

  • Value added tax

  • Sales tax

  • Net investment income tax

  • ETC

For the purpose of this article, the focus will be on net investment income tax, what it is, and how to calculate it.

WHAT IS NET INVESTMENT INCOME TAX (NIIT)?

Knowing what net investment income is will set a better platform to understanding what net investment income tax is all about. Net investment income is an income gotten from investment assets such as mutual funds, bonds, loans, stocks, etc. With the NIIT, the tax rate (the percentage at which an individual or organization is charges as tax) may vary depending on whether the income is a dividend income, an interest income, or capital gains.

Net investment income tax is a taxation system of 3.8% surtax on the portion of one’s modified adjusted income over certain threshold. This means that there is a statutory threshold amount of money an individual can keep without being taxed. However, it an individual or an organization exceeds this statutory threshold amount, it is expected that the individual or organization pay net investment income tax. The net investment income tax was imposed by 1411 of the Internal Revenue Code since January 2013. According to this code, a single person pays net investment income tax for a gross income above $200,000; married couple’s threshold is from $250,000 (if they are filing together) or $125,000 (if they are filling separately).

One thing that is certain about the value of money is that it is subject to factors like deflation and inflation. However, net investment income tax is not subject to such factors seeing that it is a fixed tax law. If for any reason, there should be a change on the net investment income tax, the tax rate has to be changed through the legislation.

A BRIEF ILLUSTRATION ON HOW TO CALCULATE THE NIIT

For a single tax payer with income more than the statutory threshold say $280,000; it is clear that the taxpayer exceeds the threshold of $200,000 for single tax payer by $80,000. To calculate the net investment income tax, 3.8% of the amount by which the tax payer exceeds the threshold is the net investment income tax.

That is;

(80,000 ÷ 100) X 3.8 = 3040

Therefore, the taxpayer who earns $80,000 more than the statutory threshold is taxed $3040 as Net Investment Income Tax.

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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