Net Investment Income Tax: Do You Have to Pay It?
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The net investment income tax (NIIT) rate is 3.8%.
You have to pay the NIIT if your MAGI exceeded $200,000 (for single filers) and you had investment income.
You can potentially avoid paying the NIIT by lowering your MAGI.
The entire goal of investing is to make additional money. But if you meet that goal, you’ll owe tax on the money you earned. And depending on your income, you may owe net investment income tax, too.
What is the net investment income tax?
The net investment income tax (NIIT) is a 3.8% tax that kicks in if you have investment income and your income exceeds $200,000 for single filers, $250,000 for those married filing jointly or $125,000 for those married filing separately.
Who has to pay the net investment income tax?
You’ll have to pay the net investment income tax if you earned money on investments and your modified adjusted gross income (MAGI) meets certain thresholds. Those thresholds depend on your filing status.
Net investment income, or the money you made from your investments, can come in several forms, including interest, dividends, capital gains and rental income, among others. Wages, unemployment compensation and Social Security benefits generally do not count as investment income.
Here are the income thresholds for the net investment income tax:
Filing status | MAGI threshold |
|---|---|
Single | $200,000. |
Married filing jointly | $250,000. |
Married filing separately | $125,000. |
Head of household (with qualifying person) | $200,000. |
Qualifying widow(er) with dependent child | $250,000. |
What is the NIIT tax rate?
The net investment income tax rate is 3.8%. It is applied to either your net investment income or the amount by which your MAGI exceeds the threshold for your status, whichever is less.
Net investment income tax and capital gains tax
If you’re thinking that your investment income is already taxed — you’re right. The net investment income tax is in addition to capital gains taxes.
How much you pay in capital gains tax depends on how long you held the asset before selling. Long-term capital gains tax is levied on the profits you made if you held the asset for over a year, while short-term capital gains tax is levied on the profits you made if you held the asset for a year or less. If your income is over the threshold for net investment income tax, you’ll pay that, too.
» Ready to crunch the numbers? Check out NerdWallet’s capital gains calculator
What counts as net investment income (NII)?
Net investment income typically includes income generated from assets such as stocks, bonds, mutual funds, index funds and rental income. Some nonqualified annuities may also count.
A certain amount from the sale of your principal home — $250,000 if filing as a single person or $500,000 if married filing jointly — isn’t considered net investment income because this amount is typically exempt from taxation. Any profit that exceeds this home sale tax exemption, however, is considered taxable net investment income.
How do you avoid the net investment income tax?
You can avoid the net investment income tax by keeping your MAGI below $200,000 for single filers, $250,000 for those married filing jointly or $125,000 for those married filing separately. But that doesn’t mean you have to make less money.
You can “reduce” your income by strategically putting money into a tax-advantaged investment account, such as a traditional 401(k). When you add money to your 401(k), it reduces your MAGI, which may lower your income to below the threshold for triggering the net investment income tax.
You can also check out municipal bonds. These tax-free bonds don’t typically earn high returns, but when used strategically, they may help you avoid exposure to the net investment income tax.
If you’re looking to reduce your tax liability through your investments, it may be wise to speak with a financial advisor.
» Need an expert opinion? View our list of the best financial advisors
Net investment income tax examples
Let’s say you are a single filer who made a $100,000 salary and also earned $150,000 by selling stocks. That brings your modified adjusted gross income to $250,000. The NIIT threshold for single filers is $200,000.
Since you exceeded the income threshold and you earned investment income, you would owe the tax.
The 3.8% net investment income tax applies to the lesser of either the amount that your modified adjusted gross income exceeds the $200,000 (or other, depending on your filing status) threshold or your investment income.
In this case, the amount that exceeds the threshold is $50,000 ($250,000 - $200,000), and your investment income is $150,000. That means you would owe the 3.8% net investment income tax on the lesser amount of $50,000, with the tax equaling $1,900.
Do I need to worry about the net investment income tax?
If you’re concerned about whether or not you have to pay the net investment income tax, it’s fairly easy to figure out based on how much money you make and if you have investment income. If you’re concerned about how to pay the net investment income tax, that's another story.
The good news is that if you’re using tax software to file your taxes, you’ll likely be guided through the process and you won’t have to worry about adding up the tax yourself. If you still have questions, it may be worth consulting a pro, such as a CPA or tax accountant, who can help you with your individual tax situation.
» Ready to file? Check out the best tax software
