Net Investment Income (NII)

Net investment income (NII) is the income that a taxpayer receives from investments, such as interest, dividends, and capital gains. NII is included in the definition of adjusted gross income (AGI) for purposes of determining the taxpayer's federal income tax liability.

There are two types of NII: portfolio income and passive income. Portfolio income is income from investments that are held for investment purposes, such as stocks, bonds, and mutual funds. Passive income is income from investments that are not held for investment purposes, such as rental property and royalties.

The tax treatment of NII depends on the type of income. Portfolio income is taxed at the ordinary income tax rates. Passive income is taxed at the lower capital gains tax rates.

There are a number of deductions that taxpayers can claim to reduce their NII. These include the investment interest expense deduction, the qualified dividend income deduction, and the capital loss deduction.

Taxpayers who have NII should be aware of the rules that apply to this type of income. By understanding the tax treatment of NII, taxpayers can minimize their tax liability.

In addition to the federal income tax, NII may also be subject to state and local income taxes. Taxpayers should consult with their tax advisor to determine the applicable tax rates in their jurisdiction.

Net investment income is an important concept for taxpayers to understand. By understanding the definition of NII and the tax rules that apply to this type of income, taxpayers can minimize their tax liability.