In calculating net investment income, which factor is included?

The correct answer is that investment income reduced by specific deductions is included when calculating net investment income. Net investment income encompasses various forms of income generated from investments, such as interest, dividends, and capital gains. However, to accurately determine the net amount that is subject to taxation, certain deductions are allowed to offset this income. These deductions can include expenses related to the management or maintenance of the investment, such as investment advisory fees or certain types of interest expenses.

Including specific deductions is essential because it provides a more precise picture of the actual income available from investments after considering the costs associated with earning that income. Without factoring in these deductions, the calculation would not reflect the true net investment income that may be subject to taxation. This understanding aligns with how tax regulations are structured to encourage investment while also ensuring taxpayers are not unfairly taxed on gross amounts that do not account for legitimate expenses connected to the generation of that income.