Net Investment Income Tax 3.8% – Net Investment Income – Application to Individuals

26 C.F.R. § 1.1411-2 Application to individuals.  (a) Individual to whom tax applies— (1) In general. Section 1411 appliesto an individual who is a citizen or resident of the United States (withinthe meaning of section 7701(a)(30)(A)). Section 1411 does not apply tononresident alien individuals (within the meaning of section7701(b)(1)(B)). See paragraph (a)(2)(vi) of this section for special rulesregarding bona fide residents of United States territories.  (2) Special rules— (i) Dual resident individuals treated as residents ofa foreign country under an income tax treaty. A dual resident taxpayer (asdefined in § 301.7701(b)-7(a)(1)) who determines that he or she is aresident of a foreign country for treaty purposes pursuant to an incometax treaty between the United States and the foreign country and whoclaims benefits of the treaty as a nonresident of the United States willbe treated as a nonresident alien of the United States for purposes ofparagraph (a)(1) of this section.  (ii) Dual-status resident aliens. A dual-status individual who is aresident of the United States for a portion of a taxable year and anonresident alien for the other portion of the taxable year will not besubject to section 1411 with respect to the portion of the year for whichthat individual is treated as a nonresident alien. The only income theindividual must take into account for purposes of section 1411 is theincome he or she receives during the portion of the year for which he orshe is treated as a resident of the United States. The threshold amountunder paragraph (d)(1) of this section applies.  (iii) Joint returns in the case of a nonresident alien individualmarried to a United States citizen or resident— (A) Default treatment. Inthe case of a United States citizen or resident who is married to anonresident alien individual, the spouses will be treated as marriedfiling separately for purposes of section 1411. For purposes ofcalculating the tax imposed under section 1411(a)(1), the United Statescitizen or resident spouse will be subject to the threshold amount for amarried taxpayer filing a separate return in paragraph (d)(1)(ii) of thissection, and the nonresident alien spouse will not be subject to tax undersection 1411. In accordance with the rules for married individuals filingseparate returns, the spouse that is a United States citizen or residentmust determine his or her own net investment income and modified adjustedgross income.  (B) Taxpayer election. Married taxpayers who file a joint Federal incometax return pursuant to a section 6013(g) election for purposes of chapter1 and chapter 24 also may elect to be treated as making a section 6013(g)election for purposes of chapter 2A (relating to the tax imposed bysection 1411).  (1) Effect of election. For purposes of calculating the tax imposedunder section 1411(a)(1), the effect of an election under section 6013(g)is to include the combined income of the United States citizen or residentspouse and the nonresident spouse in the section 1411(a)(1) calculationand to apply the threshold amount for a taxpayer making a joint return asset out in paragraph (d)(1)(i) of this section.  (2) Procedural requirements for making election. Taxpayers with asection 6013(g) election in effect for chapter 1 and chapter 24 purposesfor any taxable year beginning after December 31, 2012, or taxpayersmaking a section 6013(g) election for chapter 1 and chapter 24 purposes inany taxable year beginning after December 31, 2012, who want to applytheir section 6013(g) election for purposes of chapter 2A must make theelection for the first taxable year beginning after December 31, 2013, inwhich the United States taxpayer is subject to tax under section 1411. Thedetermination of whether the United States taxpayer is subject to taxunder section 1411 is made without regard to the effect of the section6013(g) election described in paragraph (a)(2)(iii)(B) of this section.The election, if made, must be made in the manner prescribed by forms,instructions, or in other guidance on an original or amended return forthe taxable year for which the election is made. An election can be madeon an amended return only if the taxable year for which the election ismade, and all taxable years that are affected by the election, are notclosed by the period of limitations on assessments under section 6501.Further, once made, the duration and termination of the section 6013(g)election for chapter 2A is governed by the rules of section 6013(g)(2)through (g)(6) and the regulations thereunder.  (3) Ineffective elections. In the event a taxpayer makes an electiondescribed in paragraph (a)(2)(iii)(B) of this section and subsequentlydetermines that such taxpayer does not meet the criteria for making suchelection in such tax year described in paragraph (a)(2)(iii)(B)(2) of thissection, then such original election will have no effect for that year andall future years. In such a case, the taxpayer should make appropriateadjustments to properly reflect the ineffective election. However,notwithstanding the previous sentence, if a taxpayer meets the criteriafor the same election in a subsequent year, such taxpayer is deemed totreat such original election as being made in that subsequent year unlessthe taxpayer files (or amends) the return for such subsequent year toreport the taxpayer’s net investment income tax without the originalelection. Furthermore, this paragraph (a)(2)(iii)(B)(3) shall not apply ifa taxpayer does not meet the criteria described in paragraph(a)(2)(iii)(B)(2) of this section for making such election in such taxyear solely as a result of the carryback of a net operating loss pursuantto section 172.  (iv) Joint returns for a year in which nonresident alien married to aUnited States citizen or resident becomes a United States resident— (A)Default treatment. In the case of a United States citizen or resident whois married to an individual who is a nonresident alien individual at thebeginning of any taxable year, but is a United States resident at theclose of such taxable year, each spouse will be treated as married filingseparately for the entire year for purposes of section 1411. For purposesof calculating the tax imposed under section 1411(a)(1), each spouse willbe subject to the threshold amount for a married taxpayer filing aseparate return in paragraph (d)(1)(ii) of this section. The spouse whobecomes a United States resident during the tax year will be subject tosection 1411 only with respect to income received for the portion of theyear for which he or she is treated as a United States resident. Eachspouse must determine his or her own net investment income and modifiedadjusted gross income.  (B) Taxpayer election. Married taxpayers who file a joint Federal incometax return pursuant to a section 6013(h) election for purposes of chapter1 and chapter 24 also may elect to be treated as making a section 6013(h)election for purposes of chapter 2A for such tax year.  (1) Effect of election. For purposes of calculating the tax imposedunder section 1411(a)(1), the effect of an election under section 6013(h)is to include the combined income of the United States citizen or residentspouse and the dual-status resident spouse in the section 1411(a)(1)calculation and to apply the threshold amount for a taxpayer making ajoint return as set out in paragraph (d)(1)(i) of this section.  (2) Procedural requirements for making election. Taxpayers who make asection 6013(h) election for purposes of chapter 1 and chapter 24 for anytaxable year beginning after December 31, 2012, may elect to have theirsection 6013(h) election apply for purposes of chapter 2A. The election,if made, must be made in the manner prescribed by forms, instructions, orin other guidance on an original or amended return for the taxable yearfor which the election is made. An election can be made on an amendedreturn only if the taxable year for which the election is made, and alltaxable years that are affected by the election, are not closed by theperiod of limitations on assessments under section 6501. Further, in allcases, once made, the section 6013(h) election is governed by the rules ofsection 6013(h)(2) and the regulations thereunder.  (iv) Grantor trusts. For rules regarding the treatment of owners ofgrantor trusts, see § 1.1411-3(b)(1)(v).  (v) Bankruptcy estates. A bankruptcy estate administered under chapter 7(relating to liquidations) or chapter 11 (relating to reorganizations) ofthe Bankruptcy Code (Title 11 of the United States Code) of a debtor whois an individual is treated as a married taxpayer filing a separate returnfor purposes of section 1411. See § 1.1411-2(d)(1)(ii).  (vi) Bona fide residents of United States territories— (A)Applicability. An individual who is a bona fide resident of a UnitedStates territory is subject to the tax imposed by section 1411(a)(1) onlyif the individual is required to file an income tax return with the UnitedStates upon application of section 931, 932, 933, or 935 and theregulations thereunder. With respect to an individual described in thisparagraph (a)(2)(vi)(A), the amount excluded from gross income undersection 931 or 933 and any deduction properly allocable or chargeableagainst amounts excluded from gross income under section 931 or 933,respectively, is not taken into account in computing modified adjustedgross income under paragraph (c) of this section or net investment income(within the meaning of § 1.1411-1(d)).  (B) Coordination with exception for nonresident aliens. An individualwho is both a bona fide resident of a United States territory and anonresident alien individual with respect to the United States is notsubject to taxation under section 1411(a)(1).  (C) Definitions. For purposes of this section —  (1) Bona fide resident. The term bona fide resident has the meaningprovided under section 937(a).  (2) United States territory. The term United States territory meansAmerican Samoa, Guam, the Northern Mariana Islands, Puerto Rico, or theUnited StatesVirgin Islands.  (b) Calculation of tax— (1) In general. In the case of an individualdescribed in paragraph (a)(1) of this section, the tax imposed by section1411(a)(1) for each taxable year is equal to 3.8 percent of the lesser of—  (i) Net investment income for such taxable year; or  (ii) The excess (if any) of —  (A) The modified adjusted gross income (as defined in paragraph (c)of this section) for such taxable year; over  (B) The threshold amount (as defined in paragraph (d) of this section).  (2) Example. During Year 1 (at year in which section 1411 is in effect),A, an unmarried United States citizen, has modified adjusted gross income(as defined in paragraph (c) of this section) of $190,000, which includes$50,000 of net investment income. A has a zero tax imposed under section1411 because the threshold amount for a single individual is $200,000 (asprovided in paragraph (d)(1)(iii) of this section). If during Year 2, Ahas modified adjusted gross income of $220,000, which includes $50,000 ofnet investment income, then the individual has a section 1411 tax of $760(3.8% multiplied by $20,000, the lesser of $50,000 net investment incomeor $20,000 excess of modified adjusted gross income over the thresholdamount).  (c) Modified adjusted gross income— (1) General rule. For purposes ofsection 1411, the term modified adjusted gross income means adjusted grossincome increased by the excess of —  (i) The amount excluded from gross income under section 911(a)(1); over  (ii) The amount of any deductions (taken into account in computingadjusted gross income) or exclusions disallowed under section 911(d)(6)with respect to the amounts described in paragraph (c)(1)(i) of thissection.  (2) Rules with respect to CFCs and PFICs. Additional rules in §1.1411-10(e)(1) apply to an individual that is a United States shareholderof a controlled foreign corporation (CFC) or that is a United Statesperson that directly or indirectly owns an interest in a passive foreigninvestment company (PFIC).  (d) Threshold amount— (1) In general. The term threshold amount means —  (i) In the case of a taxpayer making a joint return under section 6013or a surviving spouse (as defined in section 2(a)), $250,000;  (ii) In the case of a married taxpayer filing a separate return,$125,000; and  (iii) In the case of any other individual, $200,000.  (2) Taxable year of less than twelve months— (i) General rule. In thecase of an individual who has a taxable year consisting of less thantwelve months (short taxable year), the threshold amount under paragraph(d)(1) of this section is not reduced or prorated. For example, in thecase of an unmarried decedent who dies on June 1, the threshold amount is$200,000 for the decedent’s short taxable year that begins on January 1and ends on June 1.  (ii) Change of annual accounting period. Notwithstanding paragraph(d)(2)(i) of this section, an individual who has a short taxable yearresulting from a change of annual accounting period reduces the thresholdamount to an amount that bears the same ratio to the full threshold amountprovided under paragraph (d)(1) of this section as the number of months inthe short taxable year bears to twelve.  (e) Effective/applicability date. This section applies to taxable yearsbeginning after December 31, 2013. However, taxpayers may apply thissection to taxable years beginning after December 31, 2012, in accordancewith § 1.1411-1(f).

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