How the Net Investment Tax Works

The net investment tax is a 3.8 percent surtax on a portion of your modified adjusted gross income (MAGI) over certain thresholds. You might be subject to it even if you manage to avoid paying significant income taxes on your investment income by using deductions and credits.

Here is what the IRS says:
You’re liable for a 3.8 percent net investment income tax on the lesser of your investment income or the amount your MAGI exceeds the statutory threshold amount based on your filing status:

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

Net investment income includes but is not limited to interest, dividends, capital gains, rental and royalty income, nonqualified annuities, and income from businesses involved in the trading of financial instruments or commodities.

What doesn’t it include? Wages, unemployment compensation, Social Security benefits, alimony, distributions from certain qualified plans, and most self-employment income. Any gain on the sale of a personal residence excluded from gross income for regular income tax purposes is also excluded from net investment income.

If you owe net investment income tax, file Form 8960, which contains details on how to figure the amount of investment income subject to the tax. If you have too little withholding or you fail to pay enough quarterly estimated taxes to cover the net investment income tax, you will be subject to an estimated tax penalty.

The net investment income tax is imposed not only on individuals, but also on estates and trusts if they have undistributed net investment income and an adjusted gross income over the dollar amount at which the highest tax bracket for an estate or trust begins for a taxable year.

There are special computational rules for certain unique types of trusts, for instance, for qualified funeral trusts, charitable remainder trusts, and electing small business trusts. Trusts not subject to the net investment income tax include charitable trusts, qualified retirement plan trusts exempt from tax, and charitable remainder trusts exempt from tax.

Keep in mind that if you owe this tax, the IRS expects you to make quarterly estimated payments on the amount you think you will owe.

Contact R&A to make sure you get your calculations right. ©

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About this Author

Nate is a trusted advisor for businesses and individuals, providing tax planning, compliance support, and accounting services. He also is certified as a Personal Financial Specialist which allows him to guide clients through the many challenges and phases of their career from start-up to retirement.