Tax Analysts provides news, analysis, and commentary on relevant developments regarding net investment income (NII) tax.

The NIIT, created with the enactment of the Affordable Care Act, is imposed by section 1411 and applies at a rate of 3.8 percent on some investment income of individuals, estates, and trusts, above threshold amounts (modified adjusted gross income in excess of $200,000 or $250,000 for joint filers). Net investment income (NII) includes interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities and businesses that are passive activities (within the meaning of section 469. Form 8960 is used to compute and report the NIIT. An optional simplified reporting method is allowed for some eligible taxpayers. Nonresident aliens are not subject to the NIIT.

Recurring issues and controversies in this area include whether a person materially participates in a trade or business activity. Cases on point are Mattie K. Carter Trust v. United States and Frank Aragona Trust et al. v. Commissioner.

An active interest in a partnership or S corporation can be a non-passive interest. Some practitioners have speculated that charitable lead trusts (CLTs) and charitable remainder trusts (CRTs) will increase in popularity as practitioners search of ways to avoid the tax. Practitioners are in disagreement over whether ILM 201436049 has limited the use of limited partnerships to avoid the NII tax.