Understanding Net Investment Income Tax (NIIT) in 2024

The 2017 Tax Cuts and Jobs Act (TCJA) marked a significant overhaul of the US tax system. It reduced taxes for individuals and businesses, but it also introduced new taxes such as the Net Investment Income Tax (NIIT). NIIT is a tax on net investment income. Those who are subject to the tax will pay 3.8 percent on the lesser of the two: their net investment income or the amount by which their Modified Adjusted Gross Income (MAGI) exceeds the threshold amount.

When you sell a security for a profit, the money you make from the sale is called a capital gain. How that money is taxed depends on what type of asset you sold, how long you held it, and your tax bracket. Capital gains are subject to NIIT if they are considered part of your net investment income.

GMS Flash Alert 2024-007 highlighted the importance of understanding NIIT for US taxpayers. In Christensen v. United States, the Court of Federal Claims ruled in favor of a couple who were able to credit French income taxes against their US tax liability, including NIIT.

Discover the complexities of capital gains tax rates and how inflation plays a role in determining the tax owed on investment income. State capital gains tax rates in 2024 vary, so it's important to be aware of the specific rates in your state.

On March 11, 2024, the Biden Administration released the Fiscal Year 2025 Budget, which included details on the administration's stance on taxes, including NIIT. US persons residing in France should consider filing amended returns to claim refunds of NIIT using Foreign Tax Credits (FTCs).

Most taxpayers are familiar with wages at tax time, but investment income, which includes interest, dividends, and capital gains, can add another layer of complexity to tax filings. Understanding how NIIT applies to different types of investment income is crucial for accurate tax reporting.