Net Investment Income Tax Calculator (NIIT 3.8%)

The net investment income tax was introduced in 2013 as part of the Affordable Care Act and lives in section 1411 of the code. It adds 3.8% to investment income above a threshold, and it is separate from both income tax and payroll tax — you can owe it in a year your income tax bill barely moves.

Its structure is a "lesser of" test, and that structure is the whole point. The tax applies to the smaller of your net investment income and the amount by which your modified AGI exceeds the threshold. Someone with a $500,000 salary and $1,000 of bank interest pays 3.8% on $1,000, not on the excess. Someone with $210,000 of AGI made entirely of capital gains pays on $10,000, not on all of it.

What catches people out is that non-investment income counts toward the threshold even though this provision never taxes it. A bonus, a Roth conversion, or a large IRA withdrawal can push modified AGI over the line and drag investment income you already had into the tax.

Almost every dollar figure in the US tax code is adjusted annually for inflation. Brackets move, the standard deduction moves, the estate tax exemption moves. The section 1411 thresholds do not. They were set at $200,000 and $250,000 in the statute and have stayed there since 2013, with no indexing provision.

The consequence compounds quietly. A threshold that captured a genuinely high earner in 2013 captures a considerably more ordinary one now, purely through wage growth and inflation. Nothing needs to be legislated for this tax to reach further each year; it happens on its own.

The marriage penalty is unusually sharp here too. Two single people can each earn up to $200,000 — $400,000 between them — before the tax applies. Married, they share a $250,000 threshold. Filing separately makes it worse rather than better, at $125,000 each.

Because the tax keys off modified AGI, anything that lowers AGI can help: maximising pretax retirement contributions, health savings account contributions, or timing a large gain into a year with less other income. Deductions taken below the line — the standard deduction, itemised deductions — do not reduce AGI and so do not help at all.

Municipal bond interest is excluded from net investment income entirely, which is part of why the combined rate matters so much when comparing a muni against a taxable bond. Rental income from a business in which you materially participate is generally excluded too, though the material participation tests are strict and factual.

The most useful framing is not the annual bill but the marginal rate. If you are already above the threshold, every additional dollar of long-term gain costs 15% or 20% plus 3.8%. Deciding whether to realise a gain on an 18.8% or 23.8% basis rather than a 15% or 20% one changes the answer more often than people expect.