Tax Facts

8635 / What is the net investment income tax?

The investment income tax is a surtax of 3.8 percent in addition to the regular income tax that certain high-income taxpayers would otherwise owe on the income in question. The tax is imposed on the lesser of the following amounts:
(1)  Net investment income (see Q 8637 for an explanation of what amounts are included in net investment income); or

(2)  The excess (if any) of (i) the taxpayer’s modified adjusted gross income (MAGI) (as explained in Q 8636, below. For most taxpayers, MAGI is actually AGI) for the year over (ii) the applicable threshold amount.1

The applicable threshold amount for single taxpayers is $200,000. For married taxpayers filing a joint return, the applicable threshold amount is $250,000 (see Q 8638 for a detailed discussion of who is liable for the investment income tax). These amounts are not adjusted annually for inflation.

Example: Erica and Mickey, a married couple filing jointly, have an AGI of $400,000 including net investment income of $125,000. The applicable threshold amount for a married couple filing jointly is $250,000.

Applying the formula, the 3.8 percent net investment tax is imposed on the lesser of: |

  1. Net investment income of $125,000; or

  2. The excess of (i) AGI of $400,000 over (ii) the applicable threshold amount of $250,000, or $150,000.

Because the lesser of the two amounts is the $125,000 of net investment income, the 3.8 percent net investment income tax is imposed on the entire amount of net investment income.

Example: Assume Erica and Mickey have AGI of $300,000 including net investment income of $125,000.

Applying the formula, the 3.8 percent net investment income tax is imposed on the lesser of:

|

  1. |
    1. Net investment income of $125,000; or

    2. The excess of (i) AGI of $300,000 over (ii) the applicable threshold amount of $250,000, or $50,000.

In this case, the lesser of the two amounts is the excess of AGI over the applicable threshold amount. Thus, in spite of having net investment income of $125,000, only $50,000 is subject to the 3.8 percent net investment income tax.

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