Net Investment Income Tax (NIIT)
A 3.8% surtax on the lesser of net investment income or modified AGI exceeding $200,000 (single) or $250,000 (married filing jointly). Applies to interest, dividends, capital gains, and rental income.
The Net Investment Income Tax (NIIT) is a 3.8% surtax introduced by the Affordable Care Act in 2013, applying to individuals, estates, and trusts with investment income above certain thresholds. For individuals, the 3.8% applies to the lesser of your net investment income or the amount by which your modified AGI exceeds $200,000 (single filers), $250,000 (married filing jointly), or $125,000 (married filing separately). These thresholds are not adjusted for inflation.
Net investment income subject to NIIT includes interest, dividends, capital gains, rental and royalty income, non-qualified annuity income, and income from passive business activities. It does not include wages, self-employment income, Social Security benefits, distributions from retirement accounts (IRAs, 401(k)s), or income from active business participation.
The NIIT is calculated on Form 8960 and added to your regular tax liability. Strategies to reduce NIIT include maximizing contributions to tax-deferred retirement accounts (which lower MAGI), investing in tax-exempt municipal bonds, converting passive business activities to active participation, and timing capital gain realizations across tax years to stay below the threshold. Combined with the 20% long-term capital gains rate, the top federal rate on investment income can reach 23.8%.
Related Terms
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).
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.
Passive Activity Loss
A loss from a business or rental activity in which you do not materially participate. Passive losses can generally only be deducted against passive income, not wages or portfolio income.
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.