How Net Investment Income Tax Works

What's Investment Income?

Investment income generally covers earnings from sources like interest, profits from the sale of a piece of property or an investment, dividends, rents, royalty payments, and profits from the sale of a partnership or S-corporation. It also includes earnings from estates or trusts, under certain circumstances. Other sources of income, like your paycheck, unemployment benefits and profits from business activities aren't investment income, so they're not subject to investment income tax [source: IRS].

To calculate net investment income, a person can first deduct certain expenses related to these various sources of income. That includes brokerage and financial advisory fees, interest expenses and tax preparation costs, as well as those related to maintaining a rental property. Fiduciary fees are also deductible for taxpayers whose investment income derives from an estate or trust [source: IRS].

Even if he or she comes out in the black after making all those subtractions, a taxpayer (or a couple filing jointly) also has to meet a certain income threshold to be subject to the NIIT. A married person filing separately is on the hook for the tax only if he or she has at least $125,000 in adjusted gross income over the relevant year. The threshold figure jumps up to $200,000 for single folks and those who file as a head of household. That category applies to an unmarried person who pays more than half of the costs (rent, mortgage, etc.) to maintain a home for the person and one qualifying dependent, like a child or another family member. The minimum income for NIIT purposes rises another $50,000 to $250,000 for married couples who file a joint tax return and widows and widowers who meet certain qualifying criteria [sources: IRS, IRS].

For taxpayers who derive income from an estate or trust, the NIIT kicks in if you have net investment income that hasn't been distributed, and you also have adjusted gross income greater than the dollar amount at which the highest tax bracket for an estate or trust begins. In 2014, that amount is $12,150 [source: IRS].