Investment interest should also be deducted when high earners calculate the 3.8% Net Investment Income Tax on net investment income. Simply put, net investment income is the total profit (or loss) a company or individual earns from their investments, before taxes are accounted for. The NII tax does not include capital gains tax or dividends tax, which the investor still has to pay. Investopedia requires writers to use primary sources to support their work. For example, let's say that during the 2016 tax year, you sell some of your stock holdings at a $10,000 profit. Your input will help us help the world invest, better! Generally net investment income includes the following: For example, an individual sells 100 shares of AAPL and 50 shares of NFLX for $175/share and $170/share. Investment income is a measure of profit for investment companies such as mutual funds, and it is typically shown on a per share basis. Net Investment Income = ($100,000 - $50,000) + ($10,000) + ($20,000) - ($5,000) = $75,000. Modified AGI is your AGI increased by the amount of excluded foreign income. In calculating net investment income, taxpayers are allowed to deduct certain expenses that are tied to that income -- even if they would otherwise only be allowable as itemized deductions for regular income tax purposes. Turn Qualified Dividends into Ordinary Income. You can learn more about the standards we follow in producing accurate, unbiased content in our. During the year, you paid $500 in advisory and brokerage fees, as well as $200 in tax-preparation fees. NII is subject to a 3.8% tax and applies to individuals with an NII and MAGI above certain thresholds. Stock Advisor launched in February of 2002. Tax-Efficient Investing: A Beginner's Guide, Understanding Net Investment Income (NII), Questions and Answers on the Net Investment Income Tax. It includes dividends paid on stocks, capital gains derived from property sales and interest earned on a savings or money market account. This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. The next series of posts will discuss the ongoing debate on how to determine the material participation of trusts and estates, in particular as it relates to the 3.8-percent net investment income tax. Why Does Net Investment Income Matter? Net Investment Income Tax basics. For investment companies, this is the amount of income left after operating expenses are subtracted from total investment income, and it is typically expressed on a per-share basis. The estate's or trust's portion of net investment income tax is calculated on Form 8960 and is reported on Form 1041, Schedule G, Line 4. The total operating expenses exclude additional expenses outside the regular running of the business, such as taxes, interest paid to financiers, and other capital expenditures. The Net Investment Income Tax (NIIT) is a 3.8 percent tax on certain net investment income of individuals, estates, and trusts with income above statutory threshold amounts, referred to as modified adjusted gross income or MAGI. See how much NIIT you owe by completing Form 8960. The next series of posts will discuss the ongoing debate on how to determine the material participation of trusts and estates, in particular as it relates to the 3.8-percent net investment income … Line 12700 – Capital gains Report a capital gain or loss from selling or transferring capital property. Net investment in lease and unearned finance income Net investment in lease (NIL) equals the amount at which the lease receivable is recognized in the statement of financial position. 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