The landscape · Investing and taxes
The net investment income tax line
A 3.8 percent tax applies to investment income for people whose income passes a set threshold, on top of the regular tax on that income.
Who this exists for. This applies when a person's modified adjusted gross income passes a line set in law and they have investment income. Ticks that show it: I hold investments outside retirement accounts; My household income is well above average; I am married.
How it works
The tax is 3.8 percent of the smaller of two figures: net investment income for the year, or the amount by which modified adjusted gross income exceeds this year's official niit threshold single (not yet verified here; see the official source below) for a single filer or this year's official niit threshold married (not yet verified here; see the official source below) for a joint return. The thresholds are written in the law and are not indexed for inflation, so more people cross them each year. Net investment income includes interest, dividends, capital gains, rental and royalty income, and income from a business in which the person does not materially participate, minus the expenses tied to that income. Wages, self employment income, retirement plan distributions, and Social Security are not investment income, though they raise the income figure that decides whether the threshold is crossed. Gain on a home sale counts only above the home sale exclusion. It is figured on its own form with the return.
What it gives
Most households are below the thresholds and never owe it.
Retirement account withdrawals and wages are not themselves subject to it.
It applies only to the smaller of the two figures, so a person barely over the line owes little.
What it costs, or where the catch is
The thresholds never rise with inflation.
The married threshold is far less than twice the single one.
A large one time gain, such as selling a business or a rental, can trigger it for that year.
A worked example
Keiko is single with wages of $190,000 and $25,000 of dividends and gains, so her modified adjusted gross income is $215,000. If the single threshold were $200,000, she is $15,000 over, which is less than her $25,000 of investment income, so the tax is 3.8 percent of $15,000, which is $570. Had her wages been $250,000, the full $25,000 would be subject to it, for $950.
Where it goes wrong
The common miss is a retiree with a large required minimum distribution who does not expect the distribution to push investment income over the line, even though the distribution itself is not taxed by this rule.
Who confirms it for you
For your own numbers, a CPA or enrolled agent. This page explains how the rule works for people in general; it does not know your situation and does not tell you what to do.
The official source
IRS Tax Topic 559, Net investment income tax. Every figure that changes by year comes from the site's rules table, which the watcher checks against the official page on a schedule; where a figure is not yet verified, this page says so instead of printing a number.
Ask about The net investment income tax line
A model reads this page and answers from it. It will say when the answer is not on the page. Education, not personalized advice.
Nearby doors
- After tax contributions and the mega backdoor Roth
This exists for a worker whose plan allows after tax contributions above the deferral cap and allows them to be moved into a Roth account.
- The employee stock purchase plan discount
This exists for a worker whose employer offers an employee stock purchase plan that sells company shares at a discount through payroll.
- Nonqualified deferred compensation
This exists for higher earners, usually executives and senior staff, whose employer offers a plan to defer salary or bonus beyond what a 401(k) allows.
- Group life and disability insurance through work
This exists for a worker whose employer offers group term life insurance and short or long term disability coverage as benefits.
- The backdoor Roth and the pro rata rule
This exists for a person whose income is above the Roth IRA phase out and who has no pretax money in any traditional IRA.
- The spousal IRA
This exists for a married couple filing jointly where one spouse has little or no earned income and the other spouse earns enough to cover both contributions.
Education, not advice. Wealthy Habitat explains how rules work and never recommends what to do with your money. The No Advice Disclosure.