Like HowStuffWorks on Facebook!

How Net Investment Income Tax Works

        Money | Taxes

If you make enough money, and enough of it is investment income, you may be subject to an extra tax.
If you make enough money, and enough of it is investment income, you may be subject to an extra tax.
Ridofranz/iStockphoto/ThinkStock

Governments have lots of reasons for taxation, but the biggest — and most obvious — is that they need money. From levies on paychecks and purchases to excises for gifts and inheritance, there are few sources of income that the government won't eye as a source of funds to keep it (and all of its programs) running. When one well runs dry, the feds sometimes just dig another one by creating a new tax.

Take, for example, the Net Investment Income Tax. This was enacted in 2010 for one simple reason: The U.S. government needed to raise money, specifically to cover some of the costs associated with the Affordable Care Act. Perhaps it's no surprise, then, that the NIIT's roll out was less than smooth. The Internal Revenue Service released final regulations detailing the tax and its application in November 2013, just two months before the end of the tax period in which it took effect [source: Erb].

The good news for most taxpayers is that this complicated tax only applies to the wealthiest people in the country. There's also a trick or two for getting around it.


More to Explore