Net Investment Income Tax (NIIT)
Definition
An additional 3.8% tax on investment income for individuals with modified adjusted gross income above $200,000 (single) or $250,000 (married filing jointly).
The Net Investment Income Tax, also called the Medicare surtax on investment income, is an additional 3.8% tax that applies to the lesser of your net investment income or the amount by which your modified adjusted gross income (MAGI) exceeds the threshold.
Net 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 IRAs and most retirement plans.
The thresholds are not indexed for inflation: $200,000 for single filers, $250,000 for married filing jointly, and $125,000 for married filing separately. As incomes rise with inflation but thresholds stay fixed, more taxpayers are subject to NIIT each year.
For investors, the NIIT effectively raises the maximum long-term capital gains rate from 20% to 23.8% and the maximum short-term rate from 37% to 40.8%. It also applies to interest and dividend income above the thresholds.
Planning strategies to manage NIIT include timing capital gains to keep MAGI below thresholds in certain years, using tax-advantaged retirement accounts to shelter investment income, and considering installment sales to spread gains over multiple years.
Where this appears in Clarity
Clarity automatically tracks and calculates these concepts across your connected accounts.
Related Terms
Frequently Asked Questions
Does NIIT apply to crypto gains?
Yes. Capital gains from cryptocurrency sales are considered net investment income and are subject to the 3.8% NIIT if your modified adjusted gross income exceeds the applicable threshold.
Can I avoid NIIT by investing through a retirement account?
Distributions from traditional IRAs and 401(k)s are not considered net investment income for NIIT purposes. However, the distributions do increase your MAGI, which could cause other investment income to be subject to NIIT.