With respect to the application of the Medicare Surtax 3.8%, according to the IRS, "Net investment income" includes the following items, reduced by any deductions allocable to such income as shown below;

1. Interest, dividends, royalties, annuities, and rents.
2. Income derived from passive activities.
3. Trading financial instruments and commodities.
4. Net capital gains derived from the disposition of property (other than property held in an active trade or business).

But, according to the IRS, “Net investment income” does not include the following:

1. Active trade or business income.
2. Gain on sale of an active interest in a partnership or S corporation.
3. Distributions from IRAs or qualified retirement plans.
4. Income from tax exempt municipal bonds.
5. Tax deferred non-qualified annuities.
6. Income taken into account for self-employment tax purposes.
7. Capital gain excluded under I.R.C. §121.

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