ACA net investment income tax
The ACA (Affordable Care Act) 3.8% surtax on Net Investment Income (NII) is imposed on threshold income amounts that are dependent upon filing status and the make-up of a taxpayers' income. For individual taxpayers, the surtax will be levied on whichever of the following is less— modified adjusted gross income above the threshold, or net investment income. These income categories break down as follows:
|Modified adjusted gross income consists of||Net investment income consists of|
Adjusted gross income (AGI)
+ Foreign earned income exclusion
+ Capital gains
+ Rent and royalty income
+ Nonqualified annuities
+ Income from businesses that are passive activities to the taxpayer
– Expenses directly allocated to the production of these income sources
Note that interest from tax-exempt municipal bonds is not included in net investment income.[footnotes 1]
The tables below show the levels of investment income/ adjusted gross income that can be recognized by individual taxpayers without triggering the surtax for given levels of investment income or other earnings. The threshold amounts reflect the tax filing differences ($250,000 for married filing jointly/ surviving spouse with dependents; $200,000 for single/head of household; and $125,000 for married filing separately). The threshold amounts are not indexed to inflation.
- Contributions to employer provided retirement plans;
- Contributions to traditional IRA plans;
- Pre-tax contributions to flexible spending arrangements, health savings accounts, and health, dental, and disability insurance programs;
- Up to $3,000 a year of long-term capital losses.
Special areas of taxpayer caution involve spikes in income that can push the taxpayer beyond the surtax threshold. Examples of such income spikes include: 
- A large gain in the sale of a house that exceeds the $250,000 principal residence exclusion; 
- A taxable inheritance distribution from an estate;
- Rollover IRA conversions to a Roth IRA.
Trusts and estates should distribute income to beneficiaries rather than retain the income in the trust or estate and incur the ACA surtax at the low trust and estate threshold ($12,300 in 2015).
|Net Investment Income||$250,000 Threshold||$200,000 Threshold||$125,000 Threshold|
|Non-investment income||$250,000 Threshold||$200,000 Threshold||$125,000 Threshold|
- Also not included are wages, unemployment compensation; operating income from a nonpassive business, Social Security Benefits, alimony, tax-exempt interest, self-employment income, Alaska Permanent Fund Dividends, and distributions from qualified plans: 401(a), 403(a), 403(b), 408, 408A, or 457(b). See: Net Investment Income Tax FAQs
- The NIIT applies at a rate of 3.8 percent to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts. Estates and Trusts will be subject to the Net Investment Income Tax if they have undistributed Net Investment Income and also have adjusted gross income over the dollar amount at which the highest tax bracket for an estate or trust begins for such taxable year (for tax year 2012, this threshold amount is $11,650). See: Net Investment Income Tax FAQs
- See 26 USC § 61
- See 26 USC § 62
- CCH Tax Briefing 2014 Year-end Tax Planning, retrieved 01 December 2014.
- See 26 USC § 121
- Estate threshold: Re: "2015 Tax Brackets, Standard Deduction, and Other Update, forum discussion by Mike Piper, direct link to post.
- Topic 559 - Net Investment Income Tax, from the IRS
- Affordable Care Act Tax Provisions, from the IRS
- Net Investment Income Tax FAQs, from the IRS
- 26 CFR Part 1, Department of the Treasury, Internal Revenue Service, Net Investment Income Tax; Proposed Rule December 6, 2012. Retrieved 7 January, 2013.