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1 1 (June 30, 2023)

handle is hein.crs/govemcl0001 and id is 1 raw text is: Congressional Research Service Informing the legislative debate since 1914 0 Updated June 30, 2023 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 tax is included in Internal Revenue Code Section 1411. The tax was included as a revenue-raising offset in the Health Care and Education Reconciliation Act of 2010 (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 the NIIT to raise revenue, address income inequality concerns, or both. Repeal of the NIIT is also a policy option. This In Focus provides an overview of the tax, presents data on the distribution of the tax, and considers several policy options. Overview of the NU1T The NIIT 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 other passive business income not subject to the corporate tax. Net investment income also includes the amount of capital gain resulting from a home sale that exceeds the amount that can be excluded from taxation ($250,000 for single and head of household filers, $500,000 for married joint filers). Net investment income does not include wages, unemployment compensation, nonpassive business income, Social Security benefits, alimony, tax-exempt interest, and distributions from some 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, MAGI includes wages, salaries, tips, and other compensation; dividend and interest income; business and farm income; realized capital gains; retirement distributions; and income from a variety of other passive activities and certain foreign-earned income. For those subject to the NIIT, the amount of tax owed is equal to 3.8% multiplied by the lesser of net investment income, or the amount by which their MAGI exceeds $200,000/$250,000. Revenue Raised and Number of Taxpayers Subject to the NUlT The most recent aggregate data from the Internal Revenue Service (IRS) show that the NIIT raised $59.8 billion (preliminary figure) in tax year 2021. This represents a $43.3 billion increase from the $16.5 billion in revenue the tax raised in its first year, not adjusted for inflation. Over the same time period, the number of taxpayers subject to the tax increased from 3.1 million to 7.3 million. The increase in both the revenue generated by the tax and the number of taxpayers subject to the tax can be partly explained by the fact that the $200,000/$250,000 income thresholds are not indexed for inflation. Additionally, increases in net investment income, including from higher nominal and real (inflation-adjusted) returns to investment, have resulted in more taxpayers and more income becoming subject to the tax. Distribution of NEAT Paid By design, the tax is mostly paid by higher-income households. Table 1 shows taxpayers with income of $10 million or more paid 31.5% of the total NIIT collected in tax year 2019 (the most recent tax year for which detailed distributional data are available). These individuals paid $449,642 in NIIT on average in 2019. Table 1 also shows those making between $200,000 and $500,000 accounted for the majority of taxpayers (69.6%) subject to the 3.8% tax. The average amount of NIIT paid by these taxpayers in 2019 was $1,054. Across all taxpayers subject to the NIIT in 2019, the average amount of tax paid was $5,202. Table 1. Distribution of Net Investment Income Tax, 2019 Share of Returns Share of Adjusted Gross Income with Tax NIT Paid Less than $ 100k 0.2% 0.0% $100k under $200k 1.7% 0.1% $200k under $500k 69.6% 14.1% $500k under $1 million 19.0% 15.7% $1 million under $2 million 6.1% 13.6% $2 million under $5 million 2.5% 15.0% $5 million under $10 million 0.6% 9.8% $10 million or more 0.4% 31.5% Total 100.0% 100.0% Source: Internal Revenue Service, Statistics of Income, Table 3.3.

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