No, you cannot use Foreign Tax Credits to offset your Net Investment Income Tax liability(NIIT).
Foreign income tax credits (sections 27(a) and 901(a)) and the general business credit (section 38) are allowed as credits only against your regular US income tax liability, known as the Chapter 1 tax of the Code. They, therefore, may not be used to reduce your NIIT liability.
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What is the Net Investment Income Tax (NIIT)?
What individuals are subject to the Net Investment Income Tax?
Can tax credits reduce my NIIT liability?
What is the Net Investment Income Tax (NIIT)?
The Net Investment Income Tax (NIIT) applies at a rate of 3.8% to certain net investment income of individuals, estates, and trusts with income above the statutory threshold amounts.
This can include:
- Interest, dividends, capital gains
- Rental and royalty income
- Non-qualified annuities
- Income from businesses involved in the trading of financial instruments or commodities
- Businesses that are passive activities to the taxpayer.
What individuals are subject to the Net Investment Income Tax?
Individuals will owe the tax if they have Net Investment Income and also have modified adjusted gross income over the following thresholds:
Filing Status | Threshold Amount |
Married filing jointly | $250,000 |
Married filing separately | $125,000 |
Single | $200,000 |
Head of household (with qualifying person) | $200,000 |
Qualifying widow(er) with dependent child | $250,000 |
Can tax credits reduce my NIIT liability?
Foreign income tax credits are allowed as credits only against the tax imposed by chapter 1 of the Code and may not be used to reduce your NIIT liability.
There are current court cases pending with the IRS that allow foreign tax credits against the Net Investment Income Tax; however, the IRS is currently fighting them and has not yet implemented the decisions into law.
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Questions and Answers on the Net Investment Income Tax
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