17.1 Regular Tax and Net Investment Income Tax

17.1 Regular Tax and Net Investment Income Tax

REG Blueprint Area IV, Group F asks you to calculate the tax liability based on an individual's taxable income given a specific scenario, including consideration of the net investment income tax. Regular tax is the progressive tax on taxable income by filing status. Net investment income tax (NIIT) under IRC §1411 is a separate 3.8% overlay. Additional Medicare Tax is a 0.9% wage and self-employment tax that shares similar high-income thresholds and is often paired on the same stem. Kiddie tax and alternative minimum tax (AMT) sit at REG-light depth: know the concept, not a full worksheet.

Regular tax is a classification-plus-rate problem

Taxable income is adjusted gross income minus the greater of the standard deduction or itemized deductions, minus the qualified business income deduction when it applies. Those measurements were Area IV.B–C. Filing status — single, married filing jointly, married filing separately, head of household, qualifying surviving spouse — selects the rate schedule. Status and dependents are 16.3.

The United States uses a progressive ordinary-income schedule: additional dollars of ordinary taxable income are taxed at the next statutory rate, not at a single flat rate on the entire base. Marginal rate is the rate on the last dollar. Effective rate is total tax divided by taxable income (or AGI, if the stem says so).

AICPA's REG assumption is explicit: candidates will not be tested on specific tax rate percentages, amounts, or limitations that are indexed to inflation. Ordinary-bracket dollar cutoffs are indexed. Do not memorize this year's 22%/24% break. REG will either give you a tax table or rate-schedule excerpt, or ask a structure question — which schedule, which status, which income is ordinary versus preferential.

Preferential rates for net long-term capital gain and qualified dividends are a classification step, not a second exclusion. Those amounts are already in gross income (14.1 and 14.3). They then use the preferential long-term capital-gain rate schedule (the familiar 0%/15%/20% structure) instead of ordinary rates. Short-term capital gain is ordinary. Collectibles and unrecaptured §1250 gain are flagged for different maximum rates; do not memorize those percentages as a REG recall task. Qualified dividends remain included; they are not municipal-bond interest.

If a stem mixes wages, qualified dividends, and a long-term stock sale, split the base: ordinary taxable income on the ordinary schedule, then the preferential basket on the capital-gain schedule. Do not tax qualified dividends at ordinary rates, and do not drop them from income.

NIIT — §1411, 3.8%, lesser of two numbers

NIIT is 3.8% of the lesser of:

1. Net investment income (NII), or
2. The excess of modified adjusted gross income (MAGI) over the threshold for the filing status.

Thresholds are statutory and not indexed. They have been the same since 2013:

For most domestic taxpayers with no foreign earned income exclusion, MAGI equals AGI. MAGI for NIIT adds back the foreign earned income exclusion and a short list of related foreign exclusions.

NII generally includes taxable interest, dividends, capital gain from the sale of investment property (including the taxable slice of a principal-residence gain above the §121 exclusion), royalties, non-qualified annuities, rental income, and passive trade-or-business income. It generally excludes wages, unemployment, Social Security benefits, tax-exempt municipal-bond interest, active trade-or-business income (including active self-employment income), and distributions from qualified retirement plans and IRAs.

Form 8960 is the computation form. NIIT is an additional tax reported with other taxes, not a substitute for regular tax. A taxpayer can owe regular tax, NIIT, and Additional Medicare Tax in the same year.

Worked — MAGI $280,000 single, NII $40,000.

1. Threshold for single: $200,000.
2. MAGI excess: $280,000 − $200,000 = $80,000.
3. Lesser of NII $40,000 and MAGI excess $80,000 = $40,000.
4. NIIT = $40,000 × 3.8% = $1,520.

The 3.8% hits the $40,000 NII base, not the $80,000 excess and not the full $280,000 MAGI. If the same single taxpayer had MAGI of $210,000 and NII of $40,000, the MAGI excess would be only $10,000, and 3.8% would hit $10,000. If MAGI were $180,000, NIIT would be zero even with $40,000 of NII, because MAGI is not over the threshold.

Additional Medicare Tax is not NIIT

Additional Medicare Tax (IRC §3101(b)(2) / §1401(b)(2)) is an extra 0.9% on wages and self-employment income over $200,000 (single / head of household), $250,000 (MFJ), or $125,000 (MFS). Those thresholds are also statutory and not indexed. There is no employer match. Withholding starts when wages to that employee exceed $200,000 without regard to filing status; liability is trued up on Form 8959. Employment-tax mechanics are 8.1.

REG pairs the two taxes because the dollar thresholds look alike and both arrived with the Affordable Care Act. They are different bases:

High wages without NII can produce Additional Medicare Tax and zero NIIT. Large NII with MAGI over the threshold can produce NIIT and zero Additional Medicare Tax. Both can apply to the same return.

Kiddie tax — concept, not the indexed dollars

The kiddie tax (IRC §1(g)) taxes a child's unearned income above a threshold at the parent's rates, so shifting investment assets to a child does not automatically shift the tax into the child's lowest bracket. Earned income (wages from a summer job) is still the child's. The threshold at which unearned income starts using parental rates is inflation-indexed — do not memorize this year's figure. Form 8615 is the computation. REG wants the concept: unearned income of a child, parental rates.

AMT — a parallel tax, REG-light

Alternative minimum tax is a parallel tax: start from taxable income, apply adjustments and preference items to reach alternative minimum taxable income (often taught as AMGI / AMTI), subtract an exemption, and tax the remainder under the AMT rate structure. The taxpayer pays the greater of regular tax or tentative AMT (with a credit for prior-year AMT in some cases).

REG will not ask you to grind a full Form 6251 with this year's indexed exemption. The 2026 Blueprint assumption still bars inflation-indexed dollars. The One Big Beautiful Bill Act (signed July 4, 2025) made many TCJA-era individual AMT parameters more permanent in summary sources; exemption amounts remain indexed, so they are still not a REG memorization task. What REG may ask is identification:

• The standard deduction is an AMT adjustment (added back).
• State and local taxes deducted in computing regular tax are added back.
• Classic preference flavor: tax-exempt interest on certain private-activity bonds.
• Incentive stock option spread can be an AMT adjustment.

If you cannot compute AMT, you can still answer: AMT is a second tax on a broadened base with an exemption; the skill is recognizing an adjustment or preference, not reciting this year's exemption.

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