[Ed note: Look…I know you’re sick of the final regulations governing net investment income. I know this because I’M sick of the final regulations governing net investment income, and I get paid to write about them. But back in October, I published what I hoped would be a definitive Q&A on Section 1411. Unfortunately, the IRS issued final regulations just last week, effectively taking a blowtorch to all of my hard work. As a result, I’d be remiss if I didn’t revise the Q&A to incorporate changes mandated by the final regulations. Enjoy.]
On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act, or as it’s affectionately or derisively known, depending on your point of view, Obamacare. Following two years of contentious litigation, the Supreme Court ultimately blessed Obamacare in June 2012, but strange as it may sound, the high court’s decision did little to stop the debate. In fact, with the start date of the most controversial of the Obamacare provisions — the individual insurance mandate – looming a mere two months away, the Act continues to represent the key piece in the Congressional chess match.
Amidst the continued protests, however, other provisions of Obamacare have already taken effect. Most notable among these provisions is the new 3.8% tax on net investment income that is applied to individual taxpayers beginning January 1, 2013. There has been no shortage of confusion and misinformation surrounding this surtax, and with 2013 rapidly drawing to a close and the filing season soon to follow, the time for separating fact from fiction regarding the new tax is now.
What follows is a Q&A covering many aspects of the net investment income tax. As you will notice, it is looooong. That being said, the Q&A will be most useful if read in its entirely. Of course, I also recognize that 13,000 words on tax law is a lot to ask of anyone; as a result, I have separated the Q&A into narrow and specific categories in hopes of providing ease of use.
The categories are:
Q&A 1-3: Net Investment Income Tax, In General
Q&A 4-5: Types of Net Investment Income, In General
Q&A 6-10: “One Little i” Net Investment Income: Interest, Dividends, Rent, Royalties, Etc…
Q&A 11-13: Self-Charged Interest Income
Q&A 14-18 Self-Rental Income
Q&A 19-23: “Two Little i” Net Investment Income: Income Earned in a Passive Activity
Q&A 24-27: Grouping Elections
Q&A 27-30: Former Passive Activities
Q&A 31: “Two Little i” Net Investment Income: Income from Trading in Financial Instruments or Commodities
Q&A 32-38: “Three Little i” Income: Gains from the Sale of Property