8651 / How does the investment income tax effectively increase the tax rate for capital gains and dividends?

The 3.8 percent net investment income tax is a surtax, which means it is imposed independently on net investment income that is also subject to any other applicable income tax. To illustrate, the capital gains and dividend tax rate for higher income taxpayers is 20 percent. However, if the taxpayer is also subject to the net investment income tax, there is an additional 3.8 percent tax imposed on those same capital gains and dividends. Thus, adding the two tax rates together, the overall effective tax rate for capital gain and dividends for those taxpayers is 23.8 percent (20 percent plus 3.8 percent).