The Net Investment Income Tax (NIIT) is a 3.8% surtax that applies to investment income for certain taxpayers in the United States. It’s essentially an additional tax on top of your regular income tax.
Here’s a breakdown of the key points:
- Who it applies to: Individuals, estates, and trusts. However, there are income thresholds you need to exceed before the NIIT applies.
- What it taxes: Net investment income, which includes things like:
- Capital gains (both short-term and long-term)
- Dividends (qualified and non-qualified)
- Interest income (taxable)
- Rental and royalty income
- Passive income from investments you don’t actively manage
- Business income from trading securities or commodities
- How it’s calculated: The tax is applied to the lesser of two amounts:
- Your net investment income
- The amount by which your modified adjusted gross income (MAGI) exceeds the threshold for your tax filing status.
- Thresholds: The thresholds are adjusted periodically, but you can find the current ones on the IRS website https://www.irs.gov/individuals/net-investment-income-tax
In short, you only pay NIIT if your investment income is high enough AND your overall income exceeds a certain level.
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