Tax on investment income

The ‘You-Make-A-Lot-of-Money Tax’ Hits More Americans

The net investment income tax is coming due for millions more taxpayers than a decade ago. That’s no accident.

Laura Saunders

By Laura Saunders, The Wall Street Journal, June 23, 2023

This levy is called the net investment income tax, or NIIT for short. It’s a 3.8% surtax on a filer’s income from sources like interest, dividends and capital gains that applies if adjusted gross income, or AGI, is above $200,000 for most single filers or $250,000 for most married couples. It affects one-time spikes as well as recurring income, so taxpayers who typically earn less can owe it on a windfall. …

What income counts

The 3.8% surtax applies to net capital gains on asset sales (including cryptocurrency), dividends, interest (including on CDs and bank accounts) and royalties, among other things.

It also applies to net gains on the sale of a home above the exemption of $250,000 for single filers and $500,000 for joint filers. Rental income can be subject to the tax as well, unless it’s from an actively managed real-estate business.

What income doesn’t count

Wages, pensions, Social Security payments and taxable retirement-plan payouts aren’t themselves subject to NIIT, but can help trigger it as described below. Tax-free municipal-bond income is exempt as well.

Income from actively managed businesses such as partnerships and S corporations doesn’t count either…

The 3.8% surtax is a levy on a taxpayer’s net investment income that raises the filer’s marginal rate on it. However, the tax only applies above AGI thresholds of $200,000 for single filers and $250,000 for joint filers.

Because investment income “stacks” on top of the filer’s other income, wages, IRA withdrawals and other taxable income can help push investment income over the NIIT threshold…[end quote]

Be careful when making IRA to Roth conversions.

This is a tax with a marriage penalty.