Net Investment Income Tax.
In plain English
The net investment income tax (NIIT) is an extra 3.8% federal tax on investment income, such as interest, dividends, and capital gains, that applies to higher earners. It is charged on top of whatever ordinary income or capital gains tax you already owe on that income. It kicks in only when your modified adjusted gross income passes a fixed threshold, and it applies to the smaller of your investment income or the amount over that threshold. The thresholds are set by statute and are not adjusted for inflation.
01Why it matters
If your income crosses the threshold, a one-time event like selling a house above the exclusion or cashing out an investment can quietly add 3.8% to the tax bill you were not expecting.
02The math, step by step
The thresholds are $200,000 for single filers and $250,000 for married filing jointly. Say you are married, your income is $300,000, and $40,000 of it is investment income. You are $50,000 over the $250,000 line. The 3.8% applies to the smaller number, your $40,000 of investment income, which is $1,520.
03What this is NOT
The additional Medicare tax is 0.9% on wages and self-employment income above the same thresholds. NIIT is 3.8% on investment income. They use the same income lines but tax different kinds of income.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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