ACA 3.8% Tax Surcharge

Mar 31, 2015 by

net investment income taxDid you have investment income in 2014?

Are your income fairly high?

Then be prepared for the Affordable Care Act’s 3.8% net investment income tax surcharge to zap you.

Net Investment Income Tax Criteria

Tax law stemming from the Affordable Care Act requires a 3.8% tax on the lesser of:

  1. Your net investment income, or
  2. the amount by which your modified adjusted gross income exceeds a threshold amount based on your filing status.

1. What’s Net Investment Income?

Understanding tax law is never a one-step process, so now we need to drill down into (1) and (2) above.

First, net investment income generally includes these income streams:

  • Interest
  • Dividends
  • Capital gains (short and long)
  • Rent
  • Royalties
  • Non-qualified annuities

Note in particular that a gain on the sale of your main home is not considered net investment income, if you’re not required to include that gain in your income.

These are the most common types of investment income, but this list isn’t all-inclusive.

2. What are the Modified AGI Thresholds?

For 2014, you may owe the net investment income surcharge if your MAGI exceeds:

net invesment income tax

Note here that if the surcharge applies under this criterion, you’ll pay an extra 3.8% tax on the amount by which your income exceeds these thresholds.

If your 2014 investment income were $25,000 and your MAGI on your married-filing-jointly return were $265,000, you’d pay the net investment income tax surcharge under criterion #2 above. Your surcharge would be

→ 3.8% x ($265,000 – $250,000) = $570

Want to learn more? Read the instructions for IRS Publication 8960, Net Investment Income Tax.

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