Does the Net Investment Income Tax (NIIT) apply to you?

If an individual has income from investments, the individual may be subject to Net Investment Income Tax (NIIT).

Effective Jan. 1, 2013, individual taxpayers are liable for a 3.8 percent NIIT on the lesser of their net investment income, or the amount by which their modified adjusted gross income exceeds the statutory threshold amount based on their filing status. 

The statutory threshold amounts are:

  • Married filing jointly—$250,000,
  • Married filing separately—$125,000,
  • Single or head of household—$200,000, or
  • Qualifying widow(er) with a child—$250,000.

In general, net investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, and non-qualified annuities. It generally does not include wages, unemployment compensation, Social Security Benefits, alimony, and most self-employment income.

Additionally, net investment income does not include any gain on the sale of a principal residence that you are able to exclude from gross income for regular income tax purposes. What does this mean? Provided the taxpayer(s) meet the eligibility requirements to exclude up to $250,000 for Single/Married Filing Separately or $500,000 for Married Filing Jointly taxpayers from gross income, that amount of excludible gain is not subject to NIIT.

The NIIT is separate from the Additional Medicare Tax, which also went into effect on January 1, 2013. You may be subject to both taxes, but not on the same type of income.

Some trusts may also be subject to the tax bite of NIIT. A trust is taxed an additional 3.8% on the lesser of its undistributed net investment income for the year or the amount by which its adjusted gross income exceeds the applicable threshold amount, which is defined as the dollar amount at which the highest tax bracket begins for the tax year. Generally, charitable trusts, including charitable remainder annuity and unitrusts and those classified as grantor trusts under code sections 671-679 are not subject to NIIT.