Rohan and Meera Kapadia file a joint return for 2024 with modified adjusted gross income of 290,000 dollars. Of that, their net investment income (taxable interest, dividends, and net capital gain) is 60,000 dollars. The Net Investment Income Tax applies at 3.8 percent above a modified adjusted gross income threshold of 250,000 dollars for a married couple filing jointly. What is their Net Investment Income Tax for 2024?
- A2,280 dollars, being 3.8 percent of their full net investment income without applying any lesser-of test
- B11,020 dollars, being 3.8 percent of their entire modified adjusted gross income
- C9,500 dollars, being 3.8 percent applied to the 250,000 dollar threshold amount itself
- D1,520 dollars, being 3.8 percent of the lesser of net investment income or the excess over the threshold Correct
Why A is wrong: This applies 3.8 percent to the whole 60,000 dollars of net investment income and ignores the lesser-of test; the tax base is capped at the 40,000 dollars by which income exceeds the threshold.
Why B is wrong: This applies the rate to all 290,000 dollars of modified adjusted gross income; the Net Investment Income Tax never reaches earned income or the portion below the threshold, only the capped investment-income base.
Why C is wrong: This multiplies 3.8 percent by the 250,000 dollar threshold, but the threshold is the floor that is excluded from tax, not the base; the base is the smaller of net investment income or the amount above the threshold.
Why D is correct: The base is the lesser of net investment income (60,000 dollars) and the excess of modified adjusted gross income over the threshold (290,000 minus 250,000, or 40,000 dollars), so 3.8 percent of 40,000 dollars is 1,520 dollars.