ACA net investment income tax

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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 3.8% surtax applies to the lesser of (1) the modified adjusted gross income above the threshold or (2) the net investment income. These income categories break down as follows:

Note that interest from tax-exempt municipal bonds is not included in net investment income.

Tables
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.

Keep in mind that gross income and adjusted gross income are not always equivalent. Some common ways taxpayers reduce gross income include:


 * 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 ($12,950 for 2019 and $13,150 for 2020).