If you’re a high-income earner or someone with a diverse investment portfolio, there’s a little-known tax that can have a significant impact on your taxes that is often overlooked – the Net Investment Income Tax.
Introduced back in 2013 as part of the Affordable Care Act, the net investment income tax is a 3.8% additional tax that applies to certain types of investment income once your modified adjusted gross income crosses specific thresholds. For 2025 this tax is more relevant than ever.
The threshold amount for individuals is based on filing status and is not indexed for inflation. The threshold amount is $125,000 for taxpayers filing married filing separately; $200,000 for taxpayers filing as single or head of household; and $250,000 for those with a filing status of married filing jointly or qualifying widow(er) with a dependent child. Individuals will owe the additional net investment income tax if their modified adjusted gross income exceeds these figures. Modified adjusted gross is defined as
adjusted gross income plus foreign earned income less deductions and exclusions related that foreign earned income.
In general, investment income includes but is not limited to the following: interest income, dividend income, capital gains income, rental and royalty income, income from non-qualified annuities, income from businesses involved in trading of financial instruments or commodities and businesses that are passive activities to the taxpayer. Gains from the sale of stocks, bonds and mutual funds are subject to this tax. In addition capital gain distributions from mutual funds as well as gains from the sale of
investment real estate including gains from the sale of a second home that is not a primary residence are also subject to this tax. Gains from the sales of interests in partnerships and S corporations in which the owner is not materially participating are also subject to this tax.
The net investment income tax thresholds have not been adjusted for inflation since the tax was introduced. That means more taxpayers are finding themselves subject to the tax each year – even if their investment income has not changed. With inflation and rapid increases in the stock market of late its easier than ever to become subject to this additional tax burden.
There are several strategies to consider which help reduce the impact of the net investment income tax.
Investing in municipal bonds is exempt from both ordinary income tax as well as net investment income tax. Timing your capital gains over multiple years can help to alleviate the burden of the net investment income tax as well as tax loss harvesting. Business owners can consider grouping passive activities together to help to meet the material participation test which can serve to reclassify income and avoid the net investment income tax exposure.
For those with trusts the need to plan for the net investment income tax is even more significant as the threshold for this tax for a trust is much lower. Strategic planning around distributions and income recognition can help to mitigate the impact of this tax on the trust.
Form 8960 is used to report the net investment income tax. This form is a separate schedule that ultimately flows up into the individual income tax return, the estate return, or the trust return as applicable. The corresponding tax is paid for individuals as part of their 1040 Form, while estates and trusts include this Form 8960 as part of their 1041 return.
The net investment income tax may not be the most talked about tax, but it’s one that can quietly increase your tax liability if you are not paying attention. Whether you are a business owner, investor or retiree, understanding how this tax works, and how to plan around it is essential.
Proactive planning is key. If you are unsure of whether the net investment income tax applies to you or how to minimize its
impact you should reach out to a qualified tax advisor. With the right strategies in place, you place you can keep more your investment income yourself.
Paul Pahoresky is the managing member of PRP & Associates. He can be reached at 440-974-1040×14 or at paul@prpassoc.com. Consult your tax advisor for your specific situation for additional information and guidance on these topics.
