Advanced Underwriting Consultants

Ask the Experts – December 26

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: What portion of my client’s income will be subject to the 3.8 percent tax on net investment income?

Answer: If your client either (a) has no investment income or (b) earns less than the statutory threshold amount, he will not be subject to the 3.8 percent tax.

The threshold amount depends on your client’s filing status. If he’s married filing jointly, the threshold amount is $250,000, or half that if he’s married filing separately. If he’s not married, the threshold amount is $200,000. The threshold amounts are not indexed for inflation.

Assuming your client has both net investment income on the year, and he earns more than the threshold amount, the 3.8 percent surtax is levied on the lesser of:

  1. His net investment income for the taxable year, or
  2. The excess (if any) of—

a.   His modified adjusted gross income (MAGI) for the taxable year, over

b.   The threshold amount.

Unless your client earned income outside of the United States, his MAGI will simply be his adjusted gross income on the year, which can be found on page one of his Form 1040. Adjusted gross income is essentially gross income after certain deductions are applied.

Net investment income is essentially passively-earned income, including:

Interest income;

  • Dividends;
  • Capital gains;
  • Rental income;
  • Royalties;
  • NQDAs;
  • Income from businesses involved in trading of financial instruments; and
  • Businesses that are passive activities.

Net investment income is reduced by certain expenses that are properly allocable to the income. For example, interest expenses can offset gains from investment property. There are numerous exceptions and other rules that are worth looking into if the surtax applies to your client.

Let’s assume your client is a single-filing taxpayer that earned $220,000 on the year, which includes $50,000 of net investment income. He would incur the 3.8 percent tax on $20,000 (the lesser of (a) $50,000 net investment income, or (b) $20,000 excess of his income over the threshold amount), resulting in a $760 tax.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.