net investment income tax
A 3.8% Medicare surtax on net investment income for high earners above certain income thresholds.
Example
“The net investment income tax added 3.8% to her capital gains tax rate above the income threshold.”
Memory Tip
NIIT — an extra 3.8% on investment income for higher earners. Plan around it.
Why It Matters
This tax directly affects high-income earners and investors by reducing the after-tax returns on their investment portfolios. Understanding this 3.8% surtax helps you plan for tax-efficient investing strategies and evaluate whether your investment income will trigger this additional Medicare tax liability.
Common Misconception
Many people believe this tax only applies to investment gains, but it actually applies to all net investment income including interest, dividends, capital gains, and rental income. The tax is separate from regular income taxes and can catch people off guard if they do not account for it in their tax planning.
In Practice
A married couple filing jointly with modified adjusted gross income of $300,000 and $80,000 in net investment income would owe 3.8% tax on $20,000 of that income (the amount above the $250,000 threshold), equaling $760 in additional Medicare surtax beyond their regular federal and state income taxes.
Etymology
Created by the Affordable Care Act in 2013 — a surtax on passive investment income.
Common Misspellings
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See Also
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