Net Investment Income Tax (NIIT)

The net investment income tax is a 3.8% surtax on investment income for taxpayers with modified adjusted gross income above $200,000 (single) or $250,000 (married filing jointly), thresholds that are not indexed for inflation. It applies to interest, dividends, capital gains, rental and royalty income, and income from businesses in which the taxpayer is passive. It does not apply to wages, self-employment income (which faces its own Medicare surtax), retirement plan distributions, or income from businesses in which the owner materially participates. That last exception is the planning lever: S corporation flow-through income to an active owner escapes both self-employment tax and NIIT, and rental income earned by a qualifying real estate professional can also escape it. The tax is computed on the lesser of net investment income or the MAGI excess over the threshold, on Form 8960.