Net Investment Income (NII)

What Is Net Investment Income (NII)?

Net investment income (NII) is income received from investment assets (before taxes) like bonds, stocks, mutual funds, loans, and different investments (less related expenses). The individual tax rate on net investment income relies upon whether it is interest income, dividend income, or capital gains.

Figuring out Net Investment Income (NII)

At the point when investors sell assets from their portfolios, the proceeds from the transaction results in either a realized gain or loss. The realized gains could be capital gains from selling a stock; interest income received from fixed income items; dividends paid to shareholders of a company; rental income received from property; certain annuity payments; royalty payments; and so on. The difference between any realized gains (before taxes are applied) and trade commissions or fees is the net investment income (NII). NII could be either positive or negative contingent upon whether the asset was sold for a capital gain or loss.

For instance, an individual sells 100 shares of AAPL and 50 shares of NFLX for $175/share and $170/share. They likewise received coupon payments for the year on their corporate bonds in the sum of $2,650, notwithstanding rental income of $16,600. Their net investment income can be calculated as:

The net investment income is subject to a 3.8% tax and applies to individuals with a NII and modified adjusted gross income (MAGI) over the thresholds in the table below:

Estates and trusts are additionally subject to the NII tax on the off chance that they have undistributed net investment income and their annual adjusted gross income surpasses the dollar amount at which the highest tax bracket starts. A nonresident alien isn't subject to the tax except if they are married to a U.S. citizen or resident and chooses for be treated as a resident of the U.S. for tax purposes.

For investment companies, this is the amount of income left subsequent to operating expenses are subtracted from total investment income, and it is ordinarily communicated on a per-share basis. To find the net investment income per share of a company, partition the total investment income by the shares outstanding. This amount is accessible to shareholders as dividends. A publicly traded company must rundown its net investment income on its balance sheet.

In the event that you can reduce your reported MAGI or net investment income, you can likewise reduce your NII tax liability. Far to do that incorporate adding to retirement plans, noble cause, or tax-loss harvesting.

The most effective method to Manage Net Investment Income (NII) Tax

Regardless of whether you earn huge investment income, you can reduce your tax liabilities by making strides that reduce your reported MAGI, your net investment income, or both.

One method for diminishing your MAGI is to expand your contributions to IRAs and qualified retirement plans, or participating in deferred compensation plans. On the off chance that you can reduce your modified adjusted gross income so it doesn't surpass the threshold above, you should not pay NII tax by any means.

You can likewise reduce your net investment income through tax-loss harvesting. By selling unprofitable investments simultaneously as profitable ones, you can reduce your net investment income, and in this manner reduce your tax burden. It is likewise conceivable to reduce NII through charitable contributions, for example, a charitable remainder trust.

Starting points of the Net Investment Income (NII) Tax

The net investment income tax was passed as part of the Health Care and Education Reconciliation Act of 2010. Alongside the Affordable Care Act, the law required individuals to have medical care or face a financial penalty. The net investment income tax was incorporated as a revenue-bringing device up in order to offset the extra costs of the Affordable Care Act (ACA).

Features

• NII is subject to a 3.8% tax and applies to individuals with a NII and MAGI over certain thresholds.
• The net investment income tax came full circle in 2013, as a means to raise revenue for the Affordable Care Act.
• Bequests and trusts are additionally subject to the NII tax assuming that they have undistributed NII and their annual adjusted gross income surpasses the dollar amount at which the highest tax bracket starts.
• For investment companies, this is the amount of income left in the wake of operating expenses are subtracted from total investment income.
• Net investment income will be income received from investment assets (before taxes) like bonds, stocks, mutual funds, loans, and different investments (less related expenses).