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3.8% net investment income tax
The health care reform law also tacks a 3.8% tax on wealthier taxpayers' investment income. This net investment income tax, or NIIT, applies to taxable capital gains, dividends, interest, rental income and annuities, among other types of income.
The income thresholds are more than $125,000 for a married taxpayer filing a separate return; $200,000 for single or head of household filers; and $250,000 for married couples filing jointly and qualifying widows or widowers with a dependent child. Again, these income limits are not indexed for inflation.
Once you reach your earnings threshold, you figure your NIIT amount. Your first step is determining the amount on which to apply the 3.8% tax. It's either your annual net investment income or the amount that your modified adjusted gross income, or MAGI, exceeds your income threshold. To get your MAGI, you add back certain items you deducted to reach your adjusted gross income.
The good news is you use the lesser of the 2 amounts. Take, for example, a married couple with MAGI of $400,000 and net investment income of $200,000. Their income is $150,000 more than their $250,000 income threshold; that's less than their investment income. So this couple owes an NIIT of $5,700 ($150,000 x 3.8 percent).