What Is the Net Investment Income Tax? (2024)

FAQs

What Is the Net Investment Income Tax? ›

NIIT is a tax on net investment income. Those who are subject to the tax will pay 3.8 percent on the lesser of the following: their net investment income or the amount by which their modified adjusted gross income (MAGI) extends beyond their specific income threshold.

The Net Investment Income Tax is imposed by section 1411 of the Internal Revenue Code. The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts.

How Do I Calculate My Net Investment Income Tax? You can use IRS Form 8960 to calculate your net investment income tax. You can also calculate it yourself by adding together all your investment income and subtracting any related fees and expenses. Then determine your modified adjusted gross income.

A 3.8 percent net investment income tax (NIIT) applies to individuals, estates, and trusts that have net investment income above applicable threshold amounts.

All About the Net Investment Income Tax

The NIIT is set at 3.8% for 2024, as it was for 2023. To give some background, the net investment income tax is part of the Health Care and Education Reconciliation Act of 2010.

Not everyone will need to pay the NIIT, and only those above certain income thresholds will be subject to it. The IRS statutory income thresholds are as follows: Married filing jointly — $250,000. Married filing separately — $125,000.

A Medicare surtax of 3.8% is charged on the lesser of (1) net investment income or (2) the excess of modified adjusted gross income over a set threshold amount. The threshold is $250,000 for joint filers, $125,000 for married filing separately, and $200,000 for all other filers.

The NIIT is equal to 3.8% of the net investment income of individuals, estates, and certain trusts. Net investment income includes interest, dividends, annuities, royalties, certain rents, and certain other passive business income not subject to the corporate tax.

For example, if you were a single filer who earned $250,000, and $25,000 of that was net investment income, your NIIT would be based on only the income you earned from your investments. That's because $25,000 is less than $50,000—the difference between the $200,000 cutoff and $250,000. Your NIIT would then be $950.

Do you pay NIIT on long term capital gains? ›

Long-term capital gains and the NIIT:

In practice, the NIIT may not only apply to those in the highest capital gains tax rate bracket creating a liability of 23.8%, but it could also apply to taxpayers in the high end of the middle bracket (15%) turning their potential liability into 18.8%.

NIIT doesn't discriminate: it targets individuals, estates, and trusts, but only if they are on the higher end of the income spectrum. For individuals, the thresholds are: Single or head of household: $200,000. Married filing jointly: $250,000.

Individuals who pay net investment income tax also pay capital gains tax. But, not all individuals who pay capital gains tax owe NII tax. Think of it this way: workers pay Medicare tax on their wages. And, some high-earning workers pay additional Medicare tax on their wages above a certain threshold.

This net investment income tax also applies to certain trusts and estates. It does not apply to corporations and other “active” businesses. It does not apply to trusts associated with IRAs or pension plans.

Note: There is no standard deduction for purposes of determining your net investment income. Itemized deductions are not available for purposes of reducing net investment income unless you itemize deductions for purposes of regular income tax. However, neither standard or itemized deductions reduce MAGI.

The NIIT is a 3.8% income tax on unearned income (income other than from a job or business). It was implemented with the passing of Obamacare. Net rental income is subject to the NIIT and so is the capital gain on the sale of rental property.

Sell investments at a loss to offset investment gains. Defer capital gain, such as selling the investment in the future instead of selling it now. Use Section 1031 like-kind exchange which is selling an investment property and using that money to buy another investment property.

Most investment income is taxable. But your exact tax rate will depend on several factors, including your tax bracket, the type of investment, and (with capital assets, like stocks or property) how long you own them before selling.