PRIA, Government Policy, Made Personal

Summary

You must pay an extra 3.8% tax if you have enough investment income and your income is above a certain amount. For people, the tax is 3.8% of the smaller of (1) your net investment income for the year, or (2) the part of your modified adjusted gross income that is over the threshold. For estates and trusts, the tax is 3.8% of the smaller of undistributed net investment income or the amount their adjusted gross income is over the top tax-bracket threshold. The threshold is $250,000 for married couples filing jointly or qualifying surviving spouses, $125,000 for married people filing separately, and $200,000 for everyone else. Net investment income means things like interest, dividends, annuities, royalties, rents, capital gains, and some business income from passive activities or trading in financial instruments, after subtracting related deductions. It does not include distributions from qualified retirement plans or income that is counted as self-employment income for which the self-employment tax applies. There are special rules for selling partnership or S‑corporation interests and for working-capital investments. The tax does not apply to nonresident aliens or certain charitable trusts.

Title 26, §1411

Internal Revenue Code, Source: USLM XML via OLRC

(a)In general

Except as provided in subsection (e)—

(1)Application to individuals

In the case of an individual, there is hereby imposed (in addition to any other tax imposed by this subtitle) for each taxable year a tax equal to 3.8 percent of the lesser of— (A)

(B)the excess (if any) of—

(i)the modified adjusted gross income for such taxable year, over

(ii)the threshold amount.

(2)Application to estates and trusts

In the case of an estate or trust, there is hereby imposed (in addition to any other tax imposed by this subtitle) for each taxable year a tax of 3.8 percent of the lesser of— (A)

(B)the excess (if any) of—

(i)the adjusted gross income (as defined in section 67(e)) for such taxable year, over

(ii)the dollar amount at which the highest tax bracket in section 1(e) begins for such taxable year.

(b)Threshold amount

For purposes of this chapter, the term “threshold amount” means—

(1)in the case of a taxpayer making a joint return under section 6013 or a surviving spouse (as defined in section 2(a)), $250,000,

(2)in the case of a married taxpayer (as defined in section 7703) filing a separate return, ½ of the dollar amount determined under paragraph (1), and

(3)in any other case, $200,000.

(c)Net investment income

For purposes of this chapter—

(1)In general

The term “net investment income” means the excess (if any) of— (A)

(B)the deductions allowed by this subtitle which are properly allocable to such gross income or net gain.

(2)Trades and businesses to which tax applies

A trade or business is described in this paragraph if such trade or business is—

(A)a passive activity (within the meaning of section 469) with respect to the taxpayer, or

(B)a trade or business of trading in financial instruments or commodities (as defined in section 475(e)(2)).

(3)Income on investment of working capital subject to tax

A rule similar to the rule of section 469(e)(1)(B) shall apply for purposes of this subsection.

(4)Exception for certain active interests in partnerships and S corporations

In the case of a disposition of an interest in a partnership or S corporation—

(A)gain from such disposition shall be taken into account under clause (iii) of paragraph (1)(A) only to the extent of the net gain which would be so taken into account by the transferor if all property of the partnership or S corporation were sold for fair market value immediately before the disposition of such interest, and

(B)a rule similar to the rule of subparagraph (A) shall apply to a loss from such disposition.

(5)Exception for distributions from qualified plans

The term “net investment income” shall not include any distribution from a plan or arrangement described in section 401(a), 403(a), 403(b), 408, 408A, or 457(b).

(6)Special rule

Net investment income shall not include any item taken into account in determining self-employment income for such taxable year on which a tax is imposed by section 1401(b).

(d)Modified adjusted gross income

For purposes of this chapter, the term “modified adjusted gross income” means adjusted gross income increased by the excess of— (1)

(2)the amount of any deductions (taken into account in computing adjusted gross income) or exclusions disallowed under section 911(d)(6) with respect to the amounts described in paragraph (1).

(e)Nonapplication of section

This section shall not apply to—

(1)a nonresident alien, or

(2)a trust all of the unexpired interests in which are devoted to one or more of the purposes described in section 170(c)(2)(B).

Notes & Related Subsidiaries

Statutory Notes and Related Subsidiaries

Effective Date

Pub. L. 111–152, title I, § 1402(a)(4), Mar. 30, 2010, 124 Stat. 1063, provided that: “The

Amendments

made by this subsection [enacting this chapter and amending section 6654 of this title] shall apply to taxable years beginning after December 31, 2012.”

§1411 Imposition of Tax