Net Investment Income Tax (NIIT)

The Net Investment Income Tax, or NIIT, is an additional federal tax layered on top of regular income tax and, where applicable, the AMT. It applies to categories of investment income including interest, dividends, capital gains, rental income, and passive business income. A threshold exists above which the surtax applies; the rate and threshold are set by law and should be verified with a qualified professional, as they are subject to change.

For families with significant investment portfolios, the NIIT can meaningfully increase the effective tax rate on returns. A family receiving substantial dividends from a equity portfolio or realizing large gains from selling a business or investment property may find the NIIT adds a noticeable layer to their tax bill. Because it applies to net investment income, deductions directly connected to producing that income can reduce the base on which the tax is calculated.

A hypothetical retired couple living largely off portfolio distributions might find that in years of strong market performance their income crosses the threshold, subjecting a portion of their gains to the surtax even if their ordinary income alone would not have triggered it. A common confusion: some families assume the NIIT applies only to securities portfolios. In practice it can reach rental income, gains on real estate sales, and income from passive partnership interests. A CPA should evaluate the NIIT implications of any specific income picture.