Summer 2025

The net investment income tax (NIIT) is a 3.8% tax on modified adjusted gross income (MAGI) that exceeds the lesser of net investment income or the amount exceeding MAGI. The annual MAGI thresholds (not indexed for inflation) that can trigger NIIT are incomes over $125,000 for married filing separately, $200,000 for single or head of household filers, or $250,000 for married filing jointly.

Generally, there is no NIIT if investment income and MAGI are less than the above amounts. Common examples of income subject to NIIT (less certain expenses)¹ are:

• Interest and dividends
• Capital gains
• Royalty and rental income
• Business trading income or other such passive income
• Certain nonqualified annuities

Section 27 of the Internal Revenue Code and the preamble to Section 1411 Treasury Regulations do not permit a foreign tax credit (FTC) against the NIIT. The Court of Federal Claims, however, recently held in Bruyea v. United States² that FTCs are creditable against a taxpayer’s NIIT under the income tax treaty between the United States and Canada. The decision in Bruyea is similar to a previous decision in Christensen v. United States,³ where the court allowed a taxpayer an FTC against the NIIT under a similarly worded income tax treaty between the United States and France (but for different reasons). The ruling in Bruyea is a departure from Section 27 and the preamble to Section 1411. This conflict is resolved because, in certain circumstances, tax treaties may override the Internal Revenue Code because they are designed to prevent double taxation.

It is worth noting that paragraph 1 of Article 24 of the U.S./Canada income tax treaty reads:

“In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United State shall allow to a citizen or resident of the United States … as a credit against the United States tax on income the appropriate amount of the income tax paid or accrued.”

Further, paragraph 4 reads as follows:

“Where a United States citizen is a resident of Canada, … the United States shall allow as a credit against United States tax the income tax paid or accrued to Canada [after a deduction against Canadian tax provided for in the treaty].”

The treaty defines “United States tax” as “taxes referred to in Article 2 (Taxes Covered) … that are imposed on income by the United States.” In the Bruyea case, the government did not dispute that the NIIT falls within that definition.

Instead, the government argued – as it had in Christensen – Canadian tax is not creditable against the NIIT because of the “subject to limitations of the law of the United States” language in paragraph 1. The court in Christensen ruled for the taxpayer after noting that the “subject to the limitations” language does not appear in paragraph 4. The court ruled for the taxpayer in Bruyea on different grounds, holding that the “subject to limitations” language applies to both paragraphs 1 and 4, but that there are no limitations in U.S. law that bar an FTC against the NIIT.

The Bruyea decision represents a significant opportunity for U.S. citizen or resident taxpayers. Those who pay income taxes to countries that have an income tax treaty with the Unites States on income subject to the NIIT may be able to claim an FTC against the NIIT prospectively and may be entitled to refunds.

The analysis to determine if a taxpayer can benefit can be complex and cumbersome, particularly for prior open years. You may need to create a software program that accesses data from the tax compliance service provider used to prepare tax returns to identify those taxpayers that have paid NIIT and have FTCs available to potentially credit. (Rather than paging by hand through hundreds or thousands of tax returns to find those taxpayers that may present an opportunity for refund claims.) Then, you will need data from the investments producing the NIIT to determine if the underlying FTCs arose from a country that has enacted and executed an income tax treaty with the United States. Certain common investment countries (e.g., Singapore, Hong Kong, and Brazil to name a few) do not have income tax treaties with the United States and therefore they do not qualify. If the treaty hurdle is cleared, an FTC must be calculated against the NIIT, which can also be a complex calculation. Many tax compliance software programs may not have the ability to report an FTC against the NIIT, requiring a system override to reflect this with schedules attached to support the FTC against the NIIT. Tax return preparers and tax advisers will need to develop an effective process to analyze data to capture this potential opportunity for preparing open year refund claims and preparing returns prospectively. 

¹ There are other nuances within the NIIT rules that are not discussed herein that are beyond the scope of this article.

² Bruyea v. United States, No. 23-766T, 2014 BL 445358 (Fed. Cl. Dec. 5, 2024). Herein after “Bruyea.”

³ Christensen v. United States, 168 Fed. Cl. 263 (2023). Herein after “Christensen.”

The net investment income tax (NIIT) is a 3.8% tax on modified adjusted gross income (MAGI) that exceeds the lesser of net investment income or the amount exceeding MAGI. The annual MAGI thresholds (not indexed for inflation) that can trigger NIIT are incomes over $125,000 for married filing separately, $200,000 for single or head of household filers, or $250,000 for married filing jointly.

Generally, there is no NIIT if investment income and MAGI are less than the above amounts. Common examples of income subject to NIIT (less certain expenses)¹ are:

• Interest and dividends
• Capital gains
• Royalty and rental income
• Business trading income or other such passive income
• Certain nonqualified annuities

Section 27 of the Internal Revenue Code and the preamble to Section 1411 Treasury Regulations do not permit a foreign tax credit (FTC) against the NIIT. The Court of Federal Claims, however, recently held in Bruyea v. United States² that FTCs are creditable against a taxpayer’s NIIT under the income tax treaty between the United States and Canada. The decision in Bruyea is similar to a previous decision in Christensen v. United States,³ where the court allowed a taxpayer an FTC against the NIIT under a similarly worded income tax treaty between the United States and France (but for different reasons). The ruling in Bruyea is a departure from Section 27 and the preamble to Section 1411. This conflict is resolved because, in certain circumstances, tax treaties may override the Internal Revenue Code because they are designed to prevent double taxation.

It is worth noting that paragraph 1 of Article 24 of the U.S./Canada income tax treaty reads:

“In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United State shall allow to a citizen or resident of the United States … as a credit against the United States tax on income the appropriate amount of the income tax paid or accrued.”

Further, paragraph 4 reads as follows:

“Where a United States citizen is a resident of Canada, … the United States shall allow as a credit against United States tax the income tax paid or accrued to Canada [after a deduction against Canadian tax provided for in the treaty].”

The treaty defines “United States tax” as “taxes referred to in Article 2 (Taxes Covered) … that are imposed on income by the United States.” In the Bruyea case, the government did not dispute that the NIIT falls within that definition.

Instead, the government argued – as it had in Christensen – Canadian tax is not creditable against the NIIT because of the “subject to limitations of the law of the United States” language in paragraph 1. The court in Christensen ruled for the taxpayer after noting that the “subject to the limitations” language does not appear in paragraph 4. The court ruled for the taxpayer in Bruyea on different grounds, holding that the “subject to limitations” language applies to both paragraphs 1 and 4, but that there are no limitations in U.S. law that bar an FTC against the NIIT.

The Bruyea decision represents a significant opportunity for U.S. citizen or resident taxpayers. Those who pay income taxes to countries that have an income tax treaty with the Unites States on income subject to the NIIT may be able to claim an FTC against the NIIT prospectively and may be entitled to refunds.

The analysis to determine if a taxpayer can benefit can be complex and cumbersome, particularly for prior open years. You may need to create a software program that accesses data from the tax compliance service provider used to prepare tax returns to identify those taxpayers that have paid NIIT and have FTCs available to potentially credit. (Rather than paging by hand through hundreds or thousands of tax returns to find those taxpayers that may present an opportunity for refund claims.) Then, you will need data from the investments producing the NIIT to determine if the underlying FTCs arose from a country that has enacted and executed an income tax treaty with the United States. Certain common investment countries (e.g., Singapore, Hong Kong, and Brazil to name a few) do not have income tax treaties with the United States and therefore they do not qualify. If the treaty hurdle is cleared, an FTC must be calculated against the NIIT, which can also be a complex calculation. Many tax compliance software programs may not have the ability to report an FTC against the NIIT, requiring a system override to reflect this with schedules attached to support the FTC against the NIIT. Tax return preparers and tax advisers will need to develop an effective process to analyze data to capture this potential opportunity for preparing open year refund claims and preparing returns prospectively. 

¹ There are other nuances within the NIIT rules that are not discussed herein that are beyond the scope of this article.

² Bruyea v. United States, No. 23-766T, 2014 BL 445358 (Fed. Cl. Dec. 5, 2024). Herein after “Bruyea.”

³ Christensen v. United States, 168 Fed. Cl. 263 (2023). Herein after “Christensen.”