On Dec. 5, 2012, proposed regulations were published that address various aspects of the new Internal Revenue Code (IRC) section 1411, which will impose a tax on unearned income on investments. This new net investment income tax will have a substantial impact on certain individuals, as well as trusts and estates whose income is above the statutory threshold amounts.
In the case of an individual, section 1411(a)(1) imposes a tax each year equal to 3.8% the individual’s net investment income for the taxable year, or the excess of the taxpayer's modified adjusted income (MAGI) over a threshold amount.
Additionally, the Patient Protection and Affordable Care Act (P.L.111–148), (as amended by the Health Care and Education Reconciliation Act of 2010 (Pub.L. 111-152), contains a 3.8% net investment income tax for tax years beginning after 2012.
On Nov. 26, 2013 the IRS announced the final NIIT regulations to give taxpayers much needed clarity and simplicity. On the same day, the IRS announced proposed regulations to provide additional guidance for specific aspects of the final regulations including certain partnership payments, treatment of certain capital loss carryforwards, and optional simplified reporting method for calculation of gain or loss for the disposition of interests in partnerships and S corporations.
When the IRS issued proposed regulations many criticized them for being unclear and placing an undue administrative and financial burden for taxpayers. The AICPA submitted numerous recommendations including an optional simplified method, a version of which was incorporated into the regulations.
The final regulations also exempt cemetery perpetual care funds, Alaska Native Settlement Trusts, and foreign estates from the section 1411 tax, as the AICPA suggested, and provide a safe harbor for real estate professionals to exempt their rental activities from the section 1411 tax. Lastly, the regulations further clarify properly allocable deductions including use of capital loss carryforwards and net operating losses.
To assist in planning to minimize the impact of the tax on individuals, estates and trusts, practitioners should understand what income it applies to and how the tax is calculated. The AICPA has been continually offering recommendations and guiding principles with respect to the net investment income tax regulations. This page contains resources for members to better assist their clients in planning for this new tax.
- Aug. 5, 2013 - Comments on Section 1411 NIIT Issues Related to Controlled Foreign Corporations (CFCs) and Passive Foreign Investment Corporations (PFICs)
- Aug. 1, 2013 - Comments on Section 1411 NIIT Issues Related to Section 736 Partnership Payments
- June 17, 2013 - Comments on the Section 1411 NIIT Proposed Regulations
- May 8, 2013 - Comments on the NIIT Proposed Regulations for Trusts and Estates.
- Feb. 4, 2013 - Comments on the Paperwork Reduction Act and NIIT Proposed Regulations Under Section 1411
- Explore the New IRS Form for Net Investment Income Tax, AICPA Insights blog, Jan. 29, 2014
- Interview with the team who wrote the Net Investment Income Tax, AICPA Insights blog, Jan. 29, 2014
- Self Rental Activities Under Reg. Section 1.1411-4(g)(6)
- 3.8% Healthcare Surtax Checklist for Individuals Word or PDF (updated)
- Applying the 3.8% NIIT from Bob Keebler (updated)
- Understanding the 3.8% NIIT (updated)
- Explore the New IRS Form 8960 for NIIT (AICPA Insights, Jan. 24, 2014)
- Understanding the 3.8% Net Investment Income Tax and Its Effects, AICPA Insights, Jan. 2014
- Product flyer highlighting:
- NIIT IRS Form 8960 and Form 8959 Calculator (updated)
- Article on Gain Harvesting and the NIIT
- Article on New Brackets, Net Investment Income Tax Expand Scope of Tax Planning (Tax Adviser, Dec. 2013)
- Dec. 13, 2013 - Podcast: Understanding the 3.8% NIIT and Its Effect on Individuals, Trusts and Estates, and Closely Held Businesses After the Final Regs. (PowerPoint slides) (2-Page Overview) (Flowchart)
- Nov. 27, 2013 - Final and proposed regs. issued on 3.8% net investment income tax
- Nov. 26, 2013 - Podcast and related presentation available for members on the NIIT final regulations
- Aug. 1, 2013 - Planning for the "Parallel Universe" of the Net Investment Income Tax
- May 1, 2013 - Applying the New Net Investment Income Tax to Trusts and Estates
- Dec. 4, 2012 - IRS Issues Proposed Regs. on 3.8% Net Investment Income Tax