Net investment income tax (NIIT) is a surtax on certain types of investment income that was introduced as part of the Patient Protection and Affordable Care Act (ACA). The purpose of the NIIT is to help fund health care reform by imposing an additional tax on high-income earners who have significant investment income.
The NIIT applies to individuals, estates, and trusts with net investment income above certain thresholds. For most taxpayers, the threshold amount is $200,000 for single filers or $250,000 for married couples filing jointly. If your net investment income exceeds these amounts, you will be subject to an additional 3.8% tax on your investment earnings.
Net investment income includes interest, dividends, capital gains, rental and royalty income (except for active participation in real estate), nonqualified annuities, passive business activities such as limited partnerships or S corporations in which you do not actively participate. However wages from employment or self-employment are excluded from this category.
It’s important to note that not all types of investments are subject to the NIIT. Tax-exempt interest from municipal bonds and distributions from qualified retirement plans like 401(k)s are exempted under the rules governing this tax.
To calculate your NIIT liability you need to determine if you meet any one of three criteria: whether you file taxes as a single taxpayer; if so whether your modified adjusted gross incomes exceed $200k per year; or if you file jointly then whether your combined incomes exceed $250k annually.
If it turns out that your total taxable net-investment-incomes fall below these limits then there’s no need to worry about paying extra taxes at all!