Who pays the 3.8% net investment tax?
Those who are subject to the tax will pay 3.8 percent on the lesser of the following: their net investment income or the amount by which their modified adjusted gross income (MAGI) extends beyond their specific income threshold.
A Medicare surtax of 3.8% is charged on the lesser of (1) net investment income or (2) the excess of modified adjusted gross income over a set threshold amount. The threshold is $250,000 for joint filers, $125,000 for married filing separately, and $200,000 for all other filers.
If your income is high enough to trigger the NIIT, shifting some income investments to tax-exempt bonds could result in less exposure to the tax. Tax-exempt bonds lower your MAGI and avoid the NIIT. Dividend-paying stocks are taxed more heavily as a result of the NIIT.
The NIIT applies to income from a trade or business that is (1) a passive activity, as determined under § 469, of the taxpayer; or (2) trading in financial instruments or commodities, as determined under § 475(e)(2). The NIIT doesn't apply to wages, unemployment compensation, or income from a nonpassive business.
The net investment income tax (NIIT) is a 3.8% tax on net investment income, such as capital gains, dividends, and rental and other income after allowable deductions, to the extent the net amount exceeds the MAGI threshold.
This net investment income tax also applies to certain trusts and estates. It does not apply to corporations and other “active” businesses. It does not apply to trusts associated with IRAs or pension plans.
Attach Form 8960 to your return if your modified adjusted gross income (MAGI) is greater than the applicable threshold amount. Use Form 8960 to figure the amount of your Net Investment Income Tax (NIIT).
An employer must withhold Additional Medicare Tax from wages it pays to an individual in excess of $200,000 in a calendar year, without regard to the individual's filing status or wages paid by another employer.
There's no getting around paying tax on the interest, unless the CD is purchased in a tax-advantaged account, such as an individual retirement account (IRA) or a 401(k) plan. In this case, the same rules of tax deferral that apply to an IRA are applied to the CD.
Passive income from rental property that would otherwise be subject to the NIIT is recharacterized as non-passive if you rent the property to a business in which you materially participate. In other words, income from self-rentals is not included in net investment income.
Does 3.8% net investment income tax apply?
As an investor, you may owe an additional 3.8% tax called net investment income tax (NIIT). But you'll only owe it if you have investment income and your modified adjusted gross income (MAGI) goes over a certain amount.
For NIIT purposes, net investment income includes interest, dividends, annuities, rents and royalties, net capital gains, and other investment income, reduced by certain expenses that can be allocated to that income.
For example, if you were a single filer who earned $250,000, and $25,000 of that was net investment income, your NIIT would be based on only the income you earned from your investments. That's because $25,000 is less than $50,000—the difference between the $200,000 cutoff and $250,000. Your NIIT would then be $950.
| Filing Status | MAGI Statutory Threshold | Your Income |
|---|---|---|
| Single | $200K | $170K (wages) + $80K (NII) = $250K (MAGI) |
| Married Filing Jointly | $250K | $220K (wages) + $45K (NII) = $265K (MAGI) |
| Married Filing Separately | $125K | $150K (wages) + $40K (NII) = $190K (MAGI) |
Net rental income is generally included in the calculation of NIIT and is therefore subject to the 3.8% surtax. There is an exception if the following three conditions are met: the taxpayer is a real estate professional. the rental activity rises to the level of trade or business; and.
Social Security can potentially be subject to tax regardless of your age. While you may have heard at some point that Social Security is no longer taxable after 70 or some other age, this isn't the case. In reality, Social Security is taxed at any age if your income exceeds a certain level.
You report the taxable portion of your social security benefits on line 6b of Form 1040 or Form 1040-SR. Your benefits may be taxable if the total of (1) one-half of your benefits, plus (2) all of your other income, including tax-exempt interest, is greater than the base amount for your filing status.
nor MAGI, so it does not create or increase a taxpayer's NIIT. Therefore, a taxpayer can use a Roth IRA conversion to keep future income out of higher brackets and eliminate all future NIIT on IRA distributions.
Overview of the NIIT
Net investment income does not include wages, unemployment compensation, nonpassive business income, Social Security benefits, alimony, tax-exempt interest, and distributions from some tax-preferred retirement accounts; for example, 401(k)s, 403(b)s, and 457(b)s.
Not Direclty but Indirectly. A solo 401k is a qualified plan so no net Investment income tax (NIIT) does not apply to solo 401k distributions or conversions (e.g., the conversion for pretax solo 401k funds to the Roth solo 401k or to a Roth IRA). However, they can help to trigger it.
Who pays NIIT tax?
Not everyone will need to pay the NIIT, and only those above certain income thresholds will be subject to it. The IRS statutory income thresholds are as follows: Married filing jointly — $250,000. Married filing separately — $125,000.
2. What is the net investment income tax threshold for 2024? The NIIT thresholds for 2024 are typically $200,000 for single or head of household, $250,000 for married filing jointly, and $125,000 for married filing separately. However, these can be adjusted for inflation, so check the latest IRS updates.
- If you file a joint return or use the qualifying surviving spouse status, your MAGI (as of publication date) has to be more than $250,000.
- If you're married but file separately, your MAGI has to be more than $125,000.
- Single and head-of-household filers can report an MAGI of $200,000 or less.
This additional tax is used to help fund the Affordable Care Act tax provisions, including the premium tax credit.
There's no employer match for Additional Medicare tax. For more information, see the Instructions for Form 8959 and Questions and answers for the Additional Medicare tax.
