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Income Tax Considerations for Individuals – Part 3 of 4

As you speak with your tax advisor this year it will be of real value for you to know a bit more about what is meant by Net Investment Income (NII). Here goes:


What comprises NII?

NII includes three categories of gross income reduced by deductions properly allocable to each item:

  • Gross income from interest, dividends, annuities, royalties and rents unless such income is derived in the ordinary course of an active trade or business OTHER than a financial instruments or commodities business 
  • Gross income from a trade or business that is either (A) a passive activity for the taxpayer under IRC Sec. 469 or (B) a financial instruments or commodities business
  • Net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property other than property held in an active trade or business that is not a financial instruments or commodities business

What are some items excluded from NII?

  • Wages 
  • Qualified pensions, profit-sharing, stock bonus plans
  • Traditional IRA distributions
  • Roth distributions
  • 401(k) distributions
  • Tax exempt interest
  • Social Security income
    • Income From S corps or partnerships in which the taxpayer actively participates
  • Taxable maintenance (alimony)
  • Income earned by nonresident aliens
  • Tax exempt trusts, certain charitable trusts

The computation of NII is a project all to itself.  Once we determine what our gross NII is, we have to determine what expenses allocable to the income can be used to reduce the tax.  The IRS has just issued final regulations on how to compute this and, let me tell you, it’s not easy!  Say good-bye to “back of the envelope” tax computations.  We now have three different thresholds to worry about and four types of taxes.  Nothing is simple anymore.

Please click here to view our Year-End Tax Planning series. 

Barbara Taibi is a Partner in the Personal Wealth Advisors Group with years of public accounting and income tax planning and tax return preparation experience. Barbara focuses on helping clients plan for and meet their financial and tax goals.

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