What this line means
A 3.8% surtax on the lesser of your net investment income or the amount by which your modified adjusted gross income (MAGI) exceeds the threshold for your filing status. Net investment income includes interest, dividends, capital gains, rental income, royalties, and passive business income. The thresholds are $200,000 for single filers and $250,000 for married filing jointly. You calculate this on Form 8960.
Does this apply to you?
- Your modified AGI exceeds $200,000 (single) or $250,000 (married filing jointly)
- You have investment income from interest, dividends, capital gains, or rental properties
- You sold a home, stock, or other investment that pushed your income above the threshold for one year
- You have passive income from a business in which you do not materially participate
Easy to overlook
The thresholds are not indexed for inflation The $200,000 single and $250,000 MFJ thresholds have not changed since the NIIT took effect in 2013. 1 As wages and investment returns grow with inflation, more filers cross the threshold each year. A couple with combined wages of $230,000 and $25,000 in dividends and capital gains now owes NIIT on $5,000 of investment income — even though neither spouse individually earns an unusually high salary. IRS Form 8960 Instructions — Net Investment Income Tax
A one-time event can trigger NIIT for a single year Selling a home with a large capital gain, exercising stock options, or receiving a lump-sum distribution can push your MAGI above the threshold for one year. 2 A filer who normally earns $180,000 but sells a rental property for a $100,000 gain has MAGI of $280,000 that year and owes NIIT on $80,000 of investment income. The tax disappears the following year when income returns to normal. General filing pattern — NIIT triggered by one-time capital gain
Watch out for this
Assuming the NIIT applies to all your investment income. The 3.8% tax applies only to the lesser of your net investment income or the excess of your MAGI over the threshold. If your MAGI exceeds the threshold by $10,000 but your net investment income is $50,000, you pay 3.8% on $10,000, not $50,000. The calculation on Form 8960 determines which amount is smaller.
Footnotes
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IRS Form 8960 Instructions, Net Investment Income Tax Thresholds. https://www.irs.gov/instructions/i8960 ↩
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IRS Form 8960 Instructions, What Is Net Investment Income. https://www.irs.gov/instructions/i8960 ↩