LemonTrades
TL;DR
- The net investment income tax (NIIT) is an extra 3.8% on investment income for people above certain income levels.
- The levels are $200,000 for single filers, $250,000 for married couples filing jointly and $125,000 for married filing separately. They aren’t adjusted for inflation.
- You pay 3.8% on whichever is smaller: your net investment income, or how far your income is over the limit. It’s figured on Form 8960.
- LemonTrades tells you what moved your investments, and why, as it happens.
The tax started in 2013 to help pay for the Affordable Care Act. Because the limits never rise, more people pay it every year.
Who pays it
| Filing status | Income above |
|---|---|
| Single or head of household | $200,000 |
| Married filing jointly | $250,000 |
| Married filing separately | $125,000 |
| Qualifying surviving spouse | $250,000 |
“Income” here means modified adjusted gross income, which for most people is the adjusted gross income on their tax return. Trusts and estates have a much lower limit.
What counts as investment income
| Counts | Doesn’t count |
|---|---|
| Interest and dividends | Wages and self-employment income |
| Capital gains on stocks, funds, crypto and property | Withdrawals from IRAs and 401(k)s |
| Rent and royalties | Social Security |
| Income from businesses you don’t actively run | Tax-free municipal bond interest |
| Option-income fund payouts | The tax-free part of a gain on your home |
An example
A single person earns $180,000 in wages and has $50,000 of dividends and capital gains, for income of $230,000.
| Amount | |
|---|---|
| Income over the $200,000 limit | $30,000 |
| Net investment income | $50,000 |
| The smaller of the two | $30,000 |
| Tax at 3.8% | $1,140 |
If the same person had only $10,000 of investment income and $230,000 in total, they’d pay 3.8% of $10,000: $380.
Ways to reduce it
- Hold investments in IRAs and 401(k)s, where gains and income aren’t counted as they happen.
- Raise pre-tax retirement contributions to lower your income.
- Time big sales, spreading gains across years.
- Harvest losses to offset gains.
- Consider municipal bonds, whose interest is excluded.
It applies on top of the regular tax on dividends and gains. More on payouts: best dividend stocks for beginners and how to invest $100,000.
Sources
- IRS: Topic 559, Net investment income tax
- IRS: About Form 8960
- IRS: Questions and answers on the net investment income tax
Education, not tax advice. Check your situation with a tax professional. See our disclaimer.
