Net Investment Income Tax (NIIT)

How It Works

The Net Investment Income Tax, enacted as part of the Affordable Care Act in 2013, imposes a 3.8% surtax on the lesser of net investment income or the amount by which modified AGI exceeds the threshold ($200,000 single, $250,000 MFJ, $125,000 MFS). Investment income includes capital gains, dividends, interest, rental income, royalties, and passive business income. It does not include wages, self-employment income, Social Security benefits, or distributions from qualified retirement plans. The NIIT thresholds are not indexed to inflation, meaning more taxpayers become subject to it each year as incomes rise — a phenomenon called "bracket creep." Since 2013, the real threshold has declined significantly. For a high-income investor, the NIIT effectively adds 3.8% to the capital gains rate, bringing the maximum federal long-term capital gains rate to 23.8% (20% + 3.8%). Combined with state taxes, the total rate on investment income can exceed 37% in states like California. Planning strategies to minimize NIIT include maximizing contributions to qualified retirement accounts (which shelter investment income), converting taxable investments to tax-exempt municipal bonds, timing income recognition to stay below thresholds, and using installment sales to spread gains across multiple years. The NIIT is reported on Form 8960 and paid with your income tax return.