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Net investment income refers to the realized profits made on investment assets, including stocks, bonds, and funds, to name a few, before accounting for taxes. This includes capital gains, dividends, interest income, and subtracts any administrative fees paid, and can be calculated for both companies and individuals.

Calculating net investment income

Simply put, net investment income is the total profit (or loss) a company or individual earns from their investments, before taxes are accounted for. This includes but is not necessarily limited to:

  • Capital gains
  • Dividend income
  • Interest income
  • Rental income
  • Royalty income
  • Certain annuities
  • Passive business profits

Administrative and other investment-related fees are subtracted from the net investment income. This includes any investment interest expense, investment advisory fees, brokerage fees, expenses related to rental income, and tax preparation fees, just to name a few of the most common.

Net Investment Income

For example, let's say that during the 2016 tax year, you sell some of your stock holdings at a $10,000 profit. You also receive $2,000 in dividend income and earn $5,000 from an interest in a business in which you don't have an active role.

During the year, you paid $500 in advisory and brokerage fees, as well as $200 in tax-preparation fees. Therefore, your net investment income can be calculated by subtracting your $700 in fees from your $17,000 in various investment income.

Net Investment Income

The net investment income tax for individuals

For some individuals, net investment income can have tax implications. The net investment income tax went into effect on Jan. 1, 2013 and is applied to individuals who have net investment income as well as modified adjusted gross income (MAGI) over these thresholds:

Tax filing status

MAGI Threshold

Married filing jointly

$250,000

Married filing separately

$125,000

Single

$200,000

Head of household

$200,000

Qualifies widow(er) with dependent child

$250,000

Data source: Internal Revenue Service.

The net investment income tax is based on the amount that a taxpayer's MAGI exceeds the threshold or their entire net investment income, whichever is less.

For example, let's say that you're single, have wage income of $150,000 and you calculate net investment income of $75,000, making your total MAGI $225,000. In this case, you exceed the threshold by $25,000, so that is the amount of income subject to the tax, which is 3.8% as of this writing. Note that this is in addition to any capital gains or dividend taxes you may have to pay on your investment profits.

It's also important to mention that for tax purposes, your net investment income does not include any profits that occurred within a tax-deferred account such as an IRA or 401(k).

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