The Net Investment Income Tax

What is it?

The Affordable Care Act created the Net Investment Income Tax (NIIT) effective as of tax year 2013. This is a 3.8 percent tax on net investment income earned by individuals, estates, and trusts above a specific threshold of modified adjusted gross income. The portion of income above the threshold representing investment income is subject to the tax. As of tax year 2021 these thresholds are:

Filing StatusThreshold Amount
Married filing jointly$250,000
Married filing separate$125,000
Head of household$200,000
Qualifying widow(er) with dependent child$250,000
Income thresholds for NIIT

What is Net Investment Income?

Net investment income commonly is interest, dividends, capital gains, rental income, royalty income and annuities. However, it also includes income from businesses that are passive activities for the taxpayer and income from businesses involved in trading financial instruments or commodities. This income is subject to the tax if modified adjusted gross income is in excess of the threshold amounts.

What is Not?

Wages, unemployment, income from a non-passive business, social security, alimony, and self-employment income are not net investment income.

Other considerations for NIIT

Estates and trusts that have undistributed net investment income with gross income above a threshold are subject to NIIT, however, the income thresholds are different than for individuals.

It is possible that you may be subject to both the Additional Medicare Tax (an additional .9 percent tax on excess wages or earned income) and the Net Investment Income Tax.