Net Investment Income Tax

What is the net investment income tax?

The net investment income tax, often abbreviated NIIT, is a 3.8% tax on investment income for taxpayers with modified adjusted gross income above $200,000 for single filers or $250,000 for married couples filing jointly. Investment income includes interest, dividends, capital gains, rental income, and passive business income. Active business income is generally exempt, which matters for service firm owners.

What counts as investment income

Interest, dividends, and capital gains clearly qualify. Rental income is usually subject to NIIT unless you qualify as a real estate professional. Passive business income from entities where you do not materially participate is investment income. Income from businesses where you actively work is generally exempt. For service firm owners actively running their firms, most business income avoids NIIT.

NIIT planning considerations

The tax applies to the lesser of net investment income or the amount by which MAGI exceeds the threshold. Managing either component affects NIIT exposure. Timing capital gains around threshold years can help. Ensuring material participation in business activities keeps income exempt. If you have significant investment income and high earnings, the NIIT combines with the Medicare surtax to create a substantial marginal rate increase above the thresholds.