Net Investment Income Tax
A 3.8% surtax imposed by the Affordable Care Act on net investment income for taxpayers whose modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly).
The Net Investment Income Tax, established under Internal Revenue Code Section 1411 as part of the Affordable Care Act, took effect in 2013 and continues to apply in 2025. It is levied on the lesser of (a) the taxpayer's net investment income or (b) the amount by which their modified adjusted gross income (MAGI) exceeds the applicable threshold: $200,000 for single filers, $250,000 for married filing jointly, $125,000 for married filing separately, and $200,000 for head of household. These thresholds are not indexed for inflation and have remained unchanged since the tax was introduced, meaning more taxpayers become subject to it each year through bracket creep.
Net investment income subject to the NIIT includes dividends, interest, capital gains (both short-term and long-term), rental income, royalties, and passive business income. It does not include wages, self-employment income, Social Security benefits, alimony, tax-exempt interest, or distributions from qualified retirement plans such as 401(k)s and IRAs.
For a high-income investor, the NIIT effectively raises the top rate on long-term capital gains and qualified dividends from 20% to 23.8%, and adds 3.8% on top of ordinary rates for interest, nonqualified dividends, and short-term gains. Understanding NIIT exposure is important for year-end tax planning, particularly when deciding whether to realize large capital gains or harvest losses.
Strategies to manage NIIT liability include contributing to tax-deferred retirement accounts (which reduces MAGI), directing investments into tax-exempt bonds (whose interest is excluded from net investment income), making charitable contributions, and accelerating deductions. Business owners may be able to restructure income from passive to active participation to remove rental or business income from the NIIT base.
The NIIT is calculated on Form 8960 and reported on Form 1040. It is separate from and in addition to regular income tax, self-employment tax, and the additional Medicare tax on wages. High-income investors should incorporate NIIT projections into their quarterly estimated tax calculations to avoid underpayment penalties.