Definition
The Net Investment Income Tax is an extra 3.8% federal tax on certain investment income for higher-income taxpayers.
How It Works
It applies to the lesser of net investment income, which includes interest, dividends, capital gains, rental and royalty income, and passive business income, or the amount by which modified adjusted gross income exceeds a threshold. The thresholds are $200,000 for single filers and $250,000 for married filing jointly, and they are not indexed for inflation. The NIIT stacks on top of ordinary income tax and capital gains tax.
Example
A married couple with $400,000 of MAGI sells stock for a $100,000 gain and pays long-term capital gains tax plus an additional 3.8% NIIT on that gain.
Who It Applies To
Higher-income taxpayers with investment or passive income above the thresholds.
Watch-Outs
Because it depends on both the type of income and total MAGI, levers that reduce MAGI, such as retirement contributions or timing of gains, can reduce or eliminate it. Income from a business in which the taxpayer materially participates is generally exempt.
