The Net Investment Income Tax (NIIT) is a 3.8% surtax that applies to the investment income of certain taxpayers in the United States. It is basically an additional tax on top of your regular income tax.
Here’s a breakdown of the key points:
- To whom it applies: Persons, Estates, and Trusts. However, there are income thresholds that you need to cross before NIIT is applicable.
- What it taxes: Net investment income, which includes things like:
- Capital gains (both short term and long term)
- Dividends (Qualified and Non-Qualified)
- Interest income (taxable)
- Rental and royalty income
- Passive income from investments you don’t actively manage.
- Business income from trading securities or commodities
- How it is calculated: The tax applies to the lesser of two amounts:
- Your net investment income
- The amount by which your modified adjusted gross income (MAGI) exceeds the threshold for your tax filing status.
- range: The limits are adjusted periodically, but you can find the current ones on the IRS website.
In short, you only pay NIIT if your investment income is high enough and your gross income is above a certain level.
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