Net Investment Income Tax (NIIT)
A 3.8% surtax on investment income (interest, dividends, capital gains, rental income) for individuals with modified AGI above $200,000 (single) or $250,000 (married filing jointly).
The Net Investment Income Tax (NIIT) is a 3.8% surtax on the lesser of your net investment income or the amount by which your modified AGI exceeds the threshold. The thresholds are $200,000 for single filers, $250,000 for married filing jointly, and $125,000 for married filing separately. These thresholds are not indexed for inflation.
Net investment income includes interest, dividends, capital gains, rental and royalty income, and passive business income. It does not include wages, self-employment income, Social Security benefits, or distributions from retirement plans.
Because the NIIT thresholds have never been adjusted for inflation since the tax was introduced in 2013, more taxpayers are affected each year as incomes rise. The NIIT effectively raises the top tax rate on long-term capital gains from 20% to 23.8% and on qualified dividends from 20% to 23.8%. Strategies to reduce NIIT include maximizing retirement plan contributions, investing in tax-exempt municipal bonds, and managing the timing of capital gain realizations.
Related Terms
Capital Gains
The profit from selling a capital asset (stocks, real estate, etc.) for more than its purchase price. Capital gains are classified as short-term or long-term based on holding period.
Additional Medicare Tax
An extra 0.9% Medicare surtax on earned income above $200,000 (single) or $250,000 (married filing jointly). Unlike regular Medicare tax, it is not matched by employers.
Qualified Dividends
Dividends that meet IRS holding-period and company requirements, taxed at the lower long-term capital gains rates (0%, 15%, or 20%) instead of ordinary income rates.
Adjusted Gross Income (AGI)
Your gross income minus specific adjustments such as student loan interest, IRA contributions, and self-employment tax. AGI is the starting point for calculating your taxable income.