Net Investment Income Tax (NIIT)

What it means

The Net Investment Income Tax (NIIT) is an extra 3.8% tax that some people must pay on their investment earnings. The government uses this tax to help fund health programs. It only applies if your total income is higher than $200,000 for a single person or $250,000 for a married couple filing together.

Investment income includes money you make from selling stock or getting dividends. Your regular paycheck for work is not investment income. However, if you sell stock for a profit (a capital gain), that profit counts toward this tax. A tax professional can help you calculate if you owe this.

A simple example

Imagine Sarah is single and earns $210,000 from her job. She also sells some company stock and makes $20,000 in profit. Because her total income is over the $200,000 limit, she may owe the NIIT on part of her profit. In this case, she pays the 3.8% tax on the $10,000 that pushes her over the limit. That equals $380 in extra tax.

Why it matters to you

• It reduces the profit you get to keep after you sell shares of stock.
• You must pay this tax if your income is high, even if you did not plan for it.
• It is reported on IRS Form 8960 when you file your yearly tax return.

Common mistakes to avoid

• Forgetting that this tax is separate from your regular income tax.
• Assuming your paycheck income is the only money the government looks at when setting your tax rate.
• Not saving extra cash to pay this tax when you sell a large amount of stock for a profit.

Words used on this page

• Capital Gain: The profit you make when you sell an asset, like stock, for more than you paid for it.
• Modified AGI: A number used by the IRS to track your total yearly income before certain deductions.
• Dividend: A portion of a company's earnings paid out to people who own stock in that company.