The Net Investment Income Tax (NIIT) and the Affordable Care Act

The Affordable Care Act was passed by Congress and then signed into law by the President on March 23, 2010. Two years later, the Supreme Court rendered a final decision on June 28, 2012, to uphold parts of the health care law under Congress’ Taxing Power reserved under the US Constitution, Article 1, § 8, which provides that, “The Congress shall have the Power to lay and collect Taxes…”. This characterization by the US Supreme Court that the Affordable Care Act was indeed a “tax” was by no means a misstep.

What is the Net Investment Income Tax?

One of the many taxes imposed by the Affordable Care Act, often referred to as “Obamacare”, is the 3.8% Net Investment Income Tax.

Under the Internal Revenue Code, Section 1411, the Net Investment Income Tax or NIIT, applies to certain net investment income of individuals, estates and trust that have income above the statutory threshold. This tax went into effect on January 1, 2013 and will affect income tax returns of individuals, estate and trusts for their first tax year beginning on or after January 1, 2013.

Individual taxpayers should be aware of this NIIT tax, and how it applies to an individual or married persons having modified adjusted gross income over the threshold amounts (e.g., such as $250,000 for a married person filing jointly, of $200,000 for a single person).

However, wages, unemployment compensation; operating income from a nonpassive business, Social Security benefits, alimony, tax-exempt interest, self-employment income, and distributions from certain tax Qualified Plans (i.e., 401(a), 403(a) and (b), 457(b), etc.) will not be considered income subject to the NIIT.

Will Estate and Trusts be subject to the NIIT?

Yes, unfortunately. Estates and Trusts will be liable for the NIIT if they have undistributed Net Investment Income and also have adjusted gross income over the dollar amount at which the highest tax bracket for estates and trusts begins for the taxable year. For Tax year 2012, the threshold amount was $11,650.
But, certain types of trusts (including many of those used for estate planning) will NOT be subject to the NIIT. These include:

(1) Charitable trusts, qualified retirement plan trusts exempt under IRC section 501
(2) Grantor Trusts (living trusts under IRC §§671-679)
(3) Trusts that are not classified as “trusts” for federal income tax purposes (e.g., REITs and common trust funds); and
(4) Trusts where all of the unexpired interests are devoted to one or more of the purposes described in IRC section 170(c)(2)(B)

As the tax season is upon us, it is imperative for you to discuss the tax implications of this Obamacare tax with your certified public accountant or enrolled agent. Remember, the “Net” income investment tax is based on a calculation and formula which first starts by looking at your gross income. No doubt, this tax, like many others, will be more than a “passive” surprise to many.

For more information or if you have questions, please contact us at (520) 884-9694 to make an appointment with one of the attorneys.

IMPORTANT: Neither this blog article nor any information on this website shall be construed as the offering or rendering of any legal advice, and does not establish an attorney-client relationship between the reader and Thompson Krone, PLC (“TK”) or any attorney at TK. You should consult with an attorney if you have a specific question regarding your legal issues.