Net Investment Income (NII)

Net Investment Income (NII)

What is net investment income (NII)?

Net investment income (NII) is income from investment assets (before taxes) such as bonds, stocks, mutual funds, loans and other investments (minus related fees). The individual tax rate on net investment income depends on whether it is interest income, dividend income or capital gains.TheThe

Key points to remember

  • Net investment income is income received from investment assets (before taxes) such as bonds, stocks, mutual funds, loans and other investments (less related expenses)
  • The NII is subject to a 3.8% tax and applies to individuals whose NII and MAGI exceed certain thresholds.
  • Estates and trusts are also subject to ITN tax if they have undistributed ITN and their adjusted gross annual income exceeds the dollar amount at which the highest tax bracket begins.
  • For investment companies, this is the amount of income remaining after deduction of operating expenses from total investment income.

Understanding net investment income (NII)

When investors sell assets in their portfolios, the proceeds of the transaction translate into a realized gain or loss. The gains realized could be capital gains from the sale of a share; interest income received from fixed income products; dividends paid to shareholders of a company; rental income received from the property; certain annuity payments; Royalty payments; etc. The difference between the gains realized (before the application of taxes) and the commissions or commercial expenses is the net investment income (NII). The ITN can be positive or negative depending on whether the asset has been sold for a capital gain or loss.

For example, an individual sells 100 shares of AAPL and 50 shares of NFLX for $ 175 / share and $ 170 / share. He also received coupons for the year on his corporate bonds in the amount of $ 2,650, in addition to rental income of $ 16,600. His net investment income can be calculated as follows:

Capital gain of AAPL:

(Sales price 175 – Cost 140) x 100

$ 3,500

NFLX capital loss:

(Sales price 170 – Cost 200) x 50

(1,500)

Brokerage commissions

(35)

Interest income

2650

Rental income

16,600

Tax preparation fees

(160)

Net investment income

$ 21,055

Taxation of net investment income

Net investment income is subject to a 3.8% tax and applies to natural persons whose NII and adjusted gross income (MAGI) are above the thresholds in the table below:TheThe

Filing status

MAGI limit ($)

Single

200,000

Head of household

200,000

Deposit married separately

125,000

Jointly married filing

250,000

Qualified widow with dependent

250,000

Net investment income tax is applied to the lesser of the net investment income or the MAGI amount above the predetermined limit. For example, a single filer with annual gross income of $ 188,000 and net investment income of $ 21,055 has a MOI of $ 188,000 + $ 21,055 = $ 209,055. Since this amount is greater than the limit of $ 209,055 – $ 200,000 = $ 9,055, the individual will pay a net investment income tax of 3.8% x $ 9,055 = $ 344.09. The NII tax does not include the capital gains tax or the dividend tax that the investor still has to pay.

Estates and trusts are also subject to NII tax if they have undistributed net investment income and their annual adjusted gross income exceeds the dollar amount at which the highest tax bracket begins. A non-resident foreigner is not subject to tax unless he is married to a United States citizen or resident and chooses to be treated as a resident of the United States for tax purposes.TheThe

For investment companies, this is the amount of income remaining after deduction of operating expenses from total investment income, and is generally expressed on a per share basis. To find the net investment income per share for a business, divide the total investment income by the outstanding shares. This amount is what is available to shareholders in the form of dividends. A publicly traded company must report its net investment income on its balance sheet.

Sources of articles

Investopedia requires editors to use primary sources to support their work. These include white papers, government data, original reports and interviews with industry experts. We also reference original research from other reputable publishers, if applicable. You can find out more about the standards we follow to produce accurate and unbiased content in our
editorial policy.

  1. Internal Revenue Service. “Questions and Answers on Net Investment Income Tax.” Accessed December 11, 2019.

Compare investment accounts

×

The offers that appear in this table come from partnerships for which Investopedia receives remuneration.

Provider

Last name

The description

Leave a Comment

Your email address will not be published. Required fields are marked *