What is Net Investment Income Tax?
The Net Investment Income Tax (NIIT) is a 3.8% tax applied to individuals, estates, and trusts with income that exceeds specific thresholds. It applies to investment income like interest, dividends, capital gains, rental income, and certain passive activities. This tax is calculated on the lesser of your net investment income or the amount by which your modified adjusted gross income (MAGI) exceeds the IRS thresholds.
Key Thresholds for Net Investment Income Tax:
- $200,000 for single filers
- $250,000 for married couples filing jointly
- $125,000 for married couples filing separately
- $13,450 for estates and trusts (for 2023, updated annually)
Strategies to Minimize NIIT:
- Maximize retirement contributions (401k, IRA).
- Time capital gains over multiple years.
- Offset gains with losses to reduce net investment income.
Income Types Subject to and Excluded from NIIT
|
Income Type |
Subject to NIIT? |
|
Interest and Dividends |
Yes |
|
Capital Gains |
Yes |
|
Rental Income |
Yes |
|
Royalties and Annuities |
Yes |
|
Passive Business Activities |
Yes |
|
Wages and Salaries |
No |
|
Social Security Benefits |
No |
|
Unemployment Compensation |
No |
|
Retirement Plan Distributions |
No |
Frequently Asked Questions
1. Who is subject to Net Investment Income Tax?
Individuals, estates, and trusts whose modified adjusted gross income exceeds the IRS thresholds.
2. How is Net Investment Income Tax calculated?
NIIT is 3.8% of the lesser of your net investment income or the amount your MAGI exceeds the threshold.
3. What income is excluded from NIIT?
Wages, Social Security benefits, unemployment compensation, and distributions from qualified retirement plans are not subject to NIIT.
4. What types of income are subject to Net Investment Income Tax?
Interest, dividends, capital gains, rental income, and passive business income. Wages, Social Security, and retirement distributions are not subject to NIIT.
5. How do you calculate Net Investment Income Tax?
NIIT is 3.8% of the lesser of your net investment income or the amount your MAGI exceeds the IRS threshold.
6. Who is exempt from Net Investment Income Tax?
Those with MAGI below $200,000 (single) or $250,000 (married filing jointly) are exempt from NIIT.
For personalized assistance with your tax questions or concerns, don’t hesitate to contact us today!
