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1 1 (April 28, 2021)

handle is hein.crs/govedde0001 and id is 1 raw text is: I Reseotch $erwee ni srnir~j tho de4 te sirie 1914 April 28, 2021 The 3.8 % Net Investment Income Tax: Overview, Data, and Policy Options Since 2013, certain higher-income individuals have been subject to a 3.8% unearned income Medicare contribution tax, more commonly referred to as the net investment income tax(NIIT). The statutory authority for the taxis included in Internal Revenue Code Section 1411. The tax was included as a revenue-raising offset in the Health Care and Education Reconciliation Act of2010 (HCERA, P.L. 111-152), shortly after the Patient Protection and Affordable Care Act (P.L. 111-148) was signed into law. These two laws are commonly referred to as the Affordable Care Act or ACA. Policymakers may consider modifications to theNIITto raise revenue, address income inequality concerns, orboth. Repealof the NIIT is also a policy option. This In Focus provides an overview of the tax, presents dataon the distribution of the tax, and considers severalpolicy options. Overview of the NIT The NUT is equal to 3.8% of the net investment income of individuals, estates, and certain trusts. Net investment income includes interest, dividends, annuities, royalties, certain rents, and certain otherpassive business income not subject to the corporate tax. Net investment income also includes the amount ofcapital gain resulting froma home s ale that exceeds the amount that can be excluded from taxation ($200,000 for single, $500,000 for married filed jointly). Net investmentincome does notinclude wages, unemploymentcompensation, nonpassive business income, Social Security Benefits, alimony, tax-exempt interest, and distributions fromsome tax-preferred retirement accounts; for example, 401(k)s, 403(b)s, and 457(b)s. The tax applies to taxpayers with modified adjusted gross income (MAGI) in excess of $200,000 if single or head of household and $250,000 if married filing jointly ($125,000 for married filing separately). The income thresholds are not adjusted annually for inflation. For taxpayers without foreign-source income, MAGI generally equals adjusted gross income (AGI). Hence, MAGIincludes wages, salaries, tips, and other compensation; dividend and inteirest income; business and farmincome; realized capitalgains; retirement distributions; and income froma variety of other passive activities and certain foreign-earned income. For those subject to the NIIT, the amount of taxowed is equalto 3.8% multiplied by the lesser of net investmentincome, or the amount by which their MAGI exceeds $200000/$250000_ Who Pays the NiT? The Joint Committee on Taxation (JCT) estimates that the NIIT will raise approximately $27.5 billion of tax revenue in 2021. According to the most recent data fromthe Internal Revenue Service, the majority of the taxis paid by higher- income households. This reflects the fact that the taxonly applies to those taxpayers with income (MAGI) above $200,000 if single or head ofhousehold and $250,000 if married filing jointly. Table 1. Distribution of Net Investment Income Tax, 2018 Share of Returns Share of Adjusted Gross Income with Tax NIIT Paid Less than $1OOk 0.1% 0.0% $Iookunder$200k 1.7% 0.1% $200kunder$500k 68.8% 12.8% $500kunder $1 million 19.5% 14.9% $1 million under $2 million 6.2% 12.8% $2 million under $5 million 2.6% 14.3% $5 million under $10 million 0.6% 9.4% $10 million or more 0.4% 35.7% Total 100% 100% Source: Internal Revenue Service, Statistics of Income, Table 3.3. Table 1 shows taxpayers with income of $10 million or more paid over a third (35.7%) of the totalNIIT collected in 2018. These individuals paid $518,845 in NIIT on average in 2018. Table 1 also shows that thosemaking between $200,000 and $500,000 accounted for the majority of taxpayers (68.8%) subject to the 3.8% tax The average amount ofNIITpaidby thesetaxpayers was $1,108 in 2018. Across all taxpayers subjectto the NUT in 2018, the average amount oftaxpaid was $5,980. Policy Options A number of options pertaining to the NUT are available depending on theobjective ofpolicymakers. One optionis to leave the taxin its current form. The following discusses possible modifications to the tax. Eliminate the Tax One option wouldbe to eliminate the tax. This change would reduce thetaxburden on investment, which, to the extent investment is lower thanit otherwise would be, could https://crs rept 9

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