We Wonder What the Investment Income Tax Form Will Look Like?

Published on: 07:04AM Jan 14, 2013

Several of our posts have discussed the new 3.8% net investment income (NII) tax created by the 2010 Health Care Acts that will apply starting in 2013.  The IRS has issued proposed Regulations on how to calculate this tax and needless to say, these Regulations are long and complex.

After reviewing the Regulations, it appears the IRS will need to create at least one more long tax form to calculate this tax due to the following:

  • First, income from interest, dividends, rents, royalties, annuities and other such income must be accumulated into one bucket.
  • Second, income from passive activities and trading of financial instruments and commodities are accumulated into another bucket.
  • Third net gains from the sale of investment assets must be accumulated into the final bucket.  These net gains do not include the gains from the sale of business assets such as farm machinery, but include net gains on most other investment assets.  If the taxpayer ends up with a net loss for year, their calculation of net gains is then limited to zero.  For example, if the taxpayer has a net capital loss of $3,000, they can deduct that for regular income tax purposes, but not for NII.  As long as net investment income is greater than the excess of gross income over the threshold level, the taxpayer is not negatively impacted.


As an example, assume a taxpayer has $25,000 of net investment income and modified adjusted gross income of $270,000 after deducting a $3,000 net capital loss.  The NII subject to tax is the lessor of $25,000 or $270,000 less the $250,000 threshold level or $20,000.  Without the $3,000 capital loss, the amount subject to the NII tax would be $23,000.  In this case the $3,000 capital loss has reduced the NII tax.  Now, if modified adjusted gross income was $300,000, then the full $25,000 net investment income would be subject to the tax.  In this case, the capital loss has not reduced the NII tax.

After calculating all three of these buckets, the taxpayer then has to determine how much of their itemized and other deductions that are related to investment income are allowed as a deduction.  These calculated deductions reduce gross investment income to arrive at net investment income.

There are even more complex rules for the sale of an interest in partnerships and S corporations that we will not go into here, but as you can see, this may require an extremely complex form to be filled out and as usual increase the complexity and cost of filing your tax return.

These are proposed Regulations and the IRS is accepting comments through March of this year.  We hope some of the more complex parts of these Regulations will be removed, but we suggest not getting your hopes up too much.