What Is the Net Investment Income Tax?

Woman at a table doing paperwork with a calculator and tablet
Photo:

 Korrawin Khanta / EyeEm / Getty Images

Definition

The net investment income tax is a 3.8% surtax on a portion of your modified adjusted gross income (MAGI) over certain thresholds.

Key Takeaways

  • The net investment income tax (NIIT) is a 3.8% tax on net investment income, such as capital gains, dividends, and rental and other income after allowable deductions, to the extent the net amount exceeds the MAGI threshold.
  • This tax only applies to high-income taxpayers, such as single filers whose MAGI exceeds $200,000 and married couples filing jointly whose MAGI exceeds $250,000, as well as certain estates and trusts.
  • This tax went into effect at the beginning of 2013.

How the Net Investment Income Tax Works

The net investment income tax is a 3.8% tax on investment income that typically applies only to high-income taxpayers. It applies to individuals, families, estates, and trusts, but certain income thresholds must be met before the tax takes effect.

  • Acronym: NIIT

Net investment income can be capital gains, interest, or dividends. It can include income produced by rental properties, capital gain distributions from mutual funds, and even royalty or annuity income and interest on loans you might have extended to others.

It includes the income derived from a trade or business that is classified as passive income and income from business trading financial instruments or commodities.

When a taxpayer sells pretty much any type of investment, they'll realize either a gain or a loss—they'll make money or they'll lose money if they sell for less than what they have invested in the asset. But there are some exceptions.

Tax-exempt state interest is not included in net investment income. Gains realized from the sale of a principal residence are spared when the gain is excluded from income for income tax purposes. Gains on property held in a trade or business may also be exempt.

Note

Net investment income does not include wages, self-employment income, unemployment compensation, Social Security benefits, or alimony.

How the Net Investment Income Tax Developed

The net investment income tax was legislated as part of the Health Care and Education Reconciliation Act of 2010, which went effect in March 2010, and was included as part of that legislation to raise revenue. The net investment tax, however, went into effect on Jan. 1, 2013.

The official name of the net investment income tax is under a program known as the "Unearned Income Medicare Contribution." This suggests that the tax revenue is used to fund Medicare, but the revenue raised by this tax actually goes into the nation's general fund. In fact, you can be subject to the net investment income tax even if you're exempt from the Additional Medicare tax because these two taxes apply to different types of income.

Do I Need to Pay the Net Investment Income Tax?

The net investment income tax thresholds are based on your filing status and income. You are likely subject to this tax if you have investment income and your modified adjusted gross income exceeds certain thresholds.

Filing Status Income Threshold
Single or head of household $200,000
Married filing jointly $250,000
Married filing separately $125,000
Qualified widow(er) with a child $250,000

This tax is paid in addition to your income tax obligation. It's also over and above what you paid into Medicare through withholding from your earned income or estimated tax payments. But you're only subject to this tax if you have net investment income and your MAGI exceeds these thresholds.

The net investment income tax is imposed on estates and trusts, as well as individuals.

For individuals, it applies to U.S. citizens and resident aliens. It does not apply to non-resident aliens unless they've elected to be treated as a resident of the U.S. for tax purposes so they can file joint married tax returns.

The net investment income tax applies to estates and trusts when they have net investment income and have adjusted gross incomes for the year exceed the dollar amount at which the highest tax bracket begins. 

Note

Grantor trusts and trusts that are exempt from income taxes, such as charitable remainder trusts, are exempt from the net investment income tax.

How Do I Pay the Net Investment Income Tax?

File IRS Form 8960 with your tax return if you're subject to the net investment income tax. The form comes complete with instructions to help you determine what you owe, and it should be used by both individuals and estates or trusts.

Keep in mind that if you owe this tax, you will need to make quarterly estimated payments on the amount you think you'll owe in addition to any quarterly income payments.

Calculate Your MAGI

Your IRS Form 1040 can help you calculate your net investment income tax. First, calculate your MAGI. Start with your adjusted gross income (see line 11 of your Form 1040).

Then, you can use Form 8960 to calculate your MAGI for the net investment income tax. Put in your adjusted gross income, and add back the foreign earned income exclusion along with deductions applicable to the foreign earned income exclusion. You may need to make adjustments if you are involved with certain types of foreign corporations.

This number is your modified adjusted gross income for net investment income tax, which may be slightly different from your MAGI for other tax calculations.

Calculate Your Net Investment Income Tax Liability

The net investment income tax is due on the lesser of your undistributed net investment income or the portion of your MAGI that exceeds the thresholds. Multiply the lower number by 0.038 (3.8%). This is the amount of net investment income tax you will pay.

Frequently Asked Questions (FAQs)

Why do I owe net investment income tax?

If you make a profit from your investments, you may owe net investment income tax if your modified adjusted gross income is $125,000 or higher, depending on your tax filing situation. Single filers will need to make at least $200,000 to qualify for this tax, and married people filing jointly will need to make at least $250,000 to qualify for this tax.

Does net investment income include IRA distributions?

The IRS does not tax IRA or other retirement plan distributions as net investment income. Social Security benefits, tax-exempt interest from municipal bonds, pension plan payouts or retirement plan annuities, and life insurance proceedings are also not defined as part of net investment income by the IRS.

Was this page helpful?
Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. "Topic No. 559 Net Investment Income Tax."

  2. IRS. "Questions and Answers On the Net Investment Income Tax."

  3. Congress.gov. "H.R.4872—Health Care and Education Reconciliation Act of 2010."

  4. Congressional Research Service. "Medicare: Changes Made by the Reconciliation Act of 2010 to the Patient Protection and Affordable Care Act," Pages 8-9.

  5. Office of the Law Revision Counsel. "Chapter 2A—Unearned Income Medicare Contribution."

  6. Asena Advisors. "Net Investment Income Tax (NIIT)."

  7. IRS. "Find Out if Net Investment Income Tax Applies to You."

  8. Internal Revenue Service. "Find Out If Net Investment Income Tax Applies to You."

  9. HealthCare.gov. "Modified Adjusted Gross Income."

  10. IRS. "Questions and Answers on the Net Investment Income Tax."

  11. Charles Schwab. "Net Investment Income Tax."

Related Articles