Net Investment Income Tax (NIIT) Definition and Meaning

An extra 3.8% tax on investment income that kicks in when your modified adjusted gross income passes $200,000 (single) or $250,000 (married filing jointly).

Think of the NIIT as a Medicare-related surcharge on your investment earnings. It's 3.8%, and it applies to whichever is smaller: your net investment income or the amount your modified adjusted gross income (MAGI) exceeds the threshold.

"Net investment income" covers the usual suspects—capital gains, dividends, interest, rental income, royalties, and passive business income. It doesn't include your salary, self-employment earnings, Social Security, or most retirement account distributions.

One quirk worth knowing: the income thresholds ($200,000 single, $250,000 married filing jointly, $125,000 married filing separately) are not adjusted for inflation. They've been the same since the tax was introduced. As incomes creep up over time, more people get pulled in each year.

For investors, the practical effect is that the top long-term capital gains rate is really 23.8% (20% + 3.8%), and the top short-term rate is 40.8% (37% + 3.8%). That extra 3.8% also hits your dividends and interest once you're above the threshold.

If you're near the line, there are ways to manage it—timing when you realize gains, sheltering income inside retirement accounts, or using installment sales to spread gains across years so you stay below the threshold in some of them.

Frequently Asked Questions

▸Does NIIT apply to crypto gains?

Yes. Crypto capital gains count as net investment income, so you'll owe the 3.8% NIIT on them if your MAGI is above the threshold.

▸Can I avoid NIIT by investing through a retirement account?

Distributions from traditional IRAs and 401(k)s aren't classified as net investment income, so they dodge the NIIT directly. But those distributions do raise your MAGI, which could push other investment income over the threshold. It's a bit of a balancing act.