The short answer
The net investment income tax is an additional tax of 3.8 percent that applies to certain investment income for taxpayers whose income exceeds set thresholds. For retirees with significant investment income — such as interest, dividends, capital gains, and rental income — and higher overall income, it can add to the tax bill on top of regular income and capital gains taxes. It does not apply to everyone, only to those above the income thresholds, and it targets investment income specifically. This is educational information, not tax advice.
So the net investment income tax is an extra 3.8 percent on investment income for higher-income taxpayers above certain thresholds.
How it works
The tax applies to the lesser of your net investment income or the amount by which your income exceeds the threshold for your filing status. Net investment income generally includes interest, dividends, capital gains, and passive rental income, but not distributions from retirement accounts like IRAs, though those distributions can raise your total income enough to trigger the tax on your other investment income. Our guide to capital gains in retirement covers one type of income it can hit.
The tax targets investment income above an income threshold, and retirement-account withdrawals can push you over even though they are not themselves subject to it.
Who it affects and how to plan
The net investment income tax mainly affects higher-income retirees with substantial investment income. Managing your total income — for example, spreading large gains across years or using tax-efficient withdrawals to stay below thresholds — can reduce or avoid it. Because the thresholds and rules are specific and interact with other taxes, work with a tax professional. Our retirement income guide covers coordinating income.
The takeaway: the net investment income tax adds 3.8 percent on investment income for higher-income retirees, so managing total income around the thresholds can help — get professional guidance.
Frequently Asked Questions
What is the net investment income tax?
An additional 3.8 percent tax on certain investment income — like interest, dividends, capital gains, and rental income — for taxpayers whose income exceeds set thresholds.
Who pays the net investment income tax?
Mainly higher-income taxpayers above the income thresholds who have significant investment income. It does not apply to those below the thresholds.
Do IRA withdrawals count for the net investment income tax?
Retirement-account distributions are not themselves subject to the tax, but they can raise your total income enough to trigger it on your other investment income.
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