Net Investment Tax on Capital Gains

Many are surprised when their tax bill is higher than expected. One reason may be the Net Investment Income Tax (NIIT). Here’s what you need to know…

​What is the NIIT?
The NIIT was introduced in 2013 to help fund healthcare initiatives. It applies in addition to your regular federal income tax and long-term capital gains tax.
 
Who Pays the NIIT?
You may be subject to the 3.8% surtax if your Modified Adjusted Gross Income (MAGI) exceeds these thresholds:

• $250,000 for married couples filing jointly
• $125,000 for married filing separately
• $200,000 for single or head of household filers

 
Unlike ordinary tax brackets, these thresholds are not indexed for inflation, meaning more taxpayers may become subject to the NIIT over time.
 
What Income is Affected?
The NIIT applies to the lesser of:

1. Your net investment income (i.e. - capital gains, dividends, interest, rental income, passive business income), OR
2. The amount by which your MAGI exceeds the threshold above.

 
Example:
Suppose a married couple filing jointly has $300,000 in MAGI, including $50,000 in net capital gains.

• Their MAGI exceeds the $250,000 threshold by $50,000.
• Their net investment income is also $50,000.
• The NIIT applies to the lesser of these two amounts = $50,000.
• Result: $50,000 × 3.8% = $1,900 NIIT owed in addition to regular capital gains tax.

 
Planning Considerations
There are strategies to help manage or reduce exposure to the NIIT, such as:

• Tax-loss harvesting: Using investment losses to offset gains.
• Shifting income: Timing capital gains recognition for years when income is lower.
• Retirement contributions: Making deductible contributions to lower MAGI.
• Charitable strategies: Donating appreciated securities instead of selling them.

 
Key Takeaway
The NIIT can quietly add thousands to your tax bill if you have significant investment income or a one-time large capital gain. Proactive tax planning can make a meaningful difference!