The net investment income tax imposes a 3.8% surtax on any investment income that brings your adjusted gross income above the threshold amount of $200,000 for individual filers, $250,000 for joint filing, and $125,000 for married taxpayers filing separately.
This tax applies to interest, dividends, and capital gains, as well as rental income from real estate, royalty income from energy assets or intellectual property rights, and passive business income.
Calculating the net investment income tax can be complicated because you’re allowed to take some of the expenses you incur in generating that income as a deduction against the taxable amount. Items like investment interest expense and taxes on income at the state and local level will reduce your net investment income, and so you can use them to lower your tax liability under the provision.
Moreover, if you’re close to the income threshold, only that portion of your investment income that pushes you above the threshold is subject to tax. For instance, if you’re a single filer with adjusted gross income of $201,000 with $10,000 in net investment income, you’ll pay net investment income only on the $1,000 over the $200,000 threshold.
Many had hoped that tax reform would get rid of this tax. Even after a failed attempt to repeal the Affordable Care Act earlier in the year, lawmakers could still have eliminated the tax as a symbolic objection to the legislation.
The tax, however, is still around, and is likely to affect an increasing number of people as the years go by. The $200,000 and $250,000 income thresholds aren’t indexed for inflation, and so to the extent that inflation raises wages and incomes more broadly, a larger number of people will find their incomes above the thresholds and start having to pay these two taxes.