Topic 559 - Net Investment Income Tax

A new Net Investment Income Tax is effective beginning January 1, 2013. The 3.8 percent Net Investment Income Tax applies to individuals, estates and trusts that have certain investment income above applicable threshold amounts.

Individuals

The Net Investment Income Tax (NIIT) applies in the case of an individual, at a rate of 3.8 percent on the lesser of:

  • the net investment income, or
  • the excess of modified adjusted gross income over the following threshold amounts:
    • $250,000 for married filing jointly or qualifying widow(er) with dependent child
    • $125,000 for married filing separately
    • $200,000 in all other cases

Estates & Trusts

In the case of an estate or trust, the new tax of 3.8 percent applies on the lesser of:

  • (A) the undistributed net investment income, or
  • (B) the excess (if any) of:
    • the adjusted gross income over the dollar amount at which the highest tax bracket begins for an estate or trust for the tax year. (For estates and trusts, the 2013 threshold is $11,950)

Definition of Net Investment Income and Modified Adjusted Gross Income

In general, investment income, for purpose of this tax, includes but is not limited to:

  • interest, dividends, nonqualified annuities, royalties and rents (unless derived in a trade or business in which the NIIT does not apply),
  • certain passive or trading income from a trade or business to which the net investment income tax does apply, and
  • net gains from the disposition of property other than property held in a trade or business in which the NIIT does not apply.
The NIIT does not apply to certain types of income that are excluded for regular income tax purposes such as tax-exempt state or municipal bond interest, Veterans Administration benefits or excluded gain from the sale of a principal residence.

Modified adjusted gross income (MAGI), for purposes of the NIIT is generally defined as adjusted gross income (AGI) for regular income tax purposes increased by the foreign earned income exclusion (but also adjusted for certain deductions related to the foreign earned income). For individual taxpayers who have not excluded any foreign earned income, their regular AGI will also be their MAGI.

Reporting Net Investment Income Tax

This new tax is computed on Form 8960 (PDF), Net Investment Income Tax—Individuals, Estates, and Trusts.

  • Individuals report this tax on Form 1040 (PDF), U.S. Individual Income Tax Return;
  • Estates and trusts report this tax on Form 1041 (PDF), U.S. Income Tax Return for Estates and Trusts.
For additional information, refer to the Form 8960 Instructions and to the Net Investment Income Tax FAQs on our website.

Special Considerations for Tax Year 2013

Taxpayers may need to increase their income tax withholding or estimated taxes to consider any additional tax liability associated with the NIIT in order to avoid certain penalties.

The IRS Withholding Calculator can be used to help determine necessary changes in withholding by your employer, or see our Estimated Taxes page for resources to help you recalculate those payments. See Publication 505, Tax Withholding and Estimated Tax, for more information in either instance.

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Page Last Reviewed or Updated: February 27, 2014