The Health Care and Education Reconciliation Act’s Tax on Net Investment Income

by Brooks Pierce

One of the provisions included in the health care reform legislation enacted in 2010 will subject certain individuals to a 3.8% tax on net investment income (or "unearned income"). The new law is effective in 2013 and imposes a tax on "net investment income" when an individual taxpayer’s modified adjusted gross income exceeds $200,000 for single filers and $250,000 for joint filers. The tax is equal to 3.8% of the lesser of the taxpayer’s "net investment income" or the amount by which the taxpayer’s modified adjusted gross income exceeds the threshold (i.e. $200,000 for single filers and $250,000 for joint filers).

Trusts and estates are also subject to the new tax. For trusts and estates, the tax is equal to 3.8% of the lesser of the trust’s or estate’s undistributed net investment income or the adjusted gross income in excess of the highest tax bracket on trusts and estates (i.e., approximately $12,000 for 2013).

Are there steps you can take to minimize this tax?

Yes. See below to learn how this tax may affect you and what you can do about it.

What is "net investment income" or "unearned income"?

Net investment income includes:

  • Interest, dividends, annuities, and royalties, less allocable deductions.
  • Net gain on the sale of property unless such property was held in an active trade or business, which is not a passive activity to the taxpayer.
  • Rents (less allocable deductions) unless the rents (i) are derived in the ordinary course of a trade or business and (ii) are not derived from a passive activity as to the taxpayer.
  • Income from any active trade or business if the activity is passive to the taxpayer.

Net investment income also includes the same categories of income described above if they are allocated to a taxpayer from a partnership or S corporation. Net investment income does not include distributions from qualified plans (e.g., individual retirement accounts and qualified pension, profit-sharing and stock bonus plans) or tax-exempt interest.

So, how does this new tax impact me?

If you have modified adjusted gross income in excess of the threshold amounts and net investment income, you will be subject to the new 3.8% tax. If you are a beneficiary of a non-grantor trust and the trust has undistributed net investment income in excess of the threshold, the trust will be subject to the 3.8% tax.

Unless you take advantage of tax planning opportunities that might be available to you, if you own real estate and lease that real estate (whether to an operating company owned by you or a third party), the rent you receive will be subject to the 3.8% tax unless such rent is "derived in the ordinary course of a trade or business" and the rent is not derived from a passive activity. If you have income from a passive activity, that income will likely be subject to the 3.8% tax.

Are there tax planning opportunities to minimize the impact of the new tax?

Yes, for some taxpayers it may be possible to minimize the 3.8% tax with careful tax planning. A few planning opportunities are highlighted below:

  • Planning opportunities exist when taxpayers own an interest in real property (directly or indirectly through a partnership, S corporation or trust) and lease that real property to an operating company owned by the taxpayers (directly or indirectly through a partnership, S corporation, or trust). Under this scenario, there may be several opportunities for restructuring the companies in a way to minimize the tax on rents for those taxpayers that materially participate in the business (i.e., the business is not a passive activity to the taxpayer).
  • Planning opportunities exist for trusts with undistributed net investment income and companies with excess cash that is invested and earns interest income, which will be subject to the 3.8% tax.
  • Planning opportunities also exist for those taxpayers planning to sell interests in partnerships, limited liability companies, and S corporations if they are actively involved in the business.

Who should I call?

If you are interested in learning how the new 3.8% tax will impact you or your business and how to minimize that impact, please contact Bill McNairy, Sara Vizithum or Susan Young.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Brooks Pierce | Attorney Advertising

Written by:

Brooks Pierce

Brooks Pierce on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.