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April 28, 2021
The 3.8% Net Investment Income Tax: Overview, Data, and
Since 2013, certain higher-income individuals have been
Who Pays the NIIT?
subject to a 3.8% “unearned income Medicare contribution”
The Joint Committee on Taxation (JCT) estimates that the
tax, more commonly referred to as the net investment
NIIT will raise approximately $27.5 billion of tax revenue
income tax (NIIT). The statutory authority for the tax is
in 2021. According to the most recent data from the Internal
included in Internal Revenue Code Section 1411. The tax
Revenue Service, the majority of the tax is paid by higher-
was included as a revenue-raising offset in the Health Care
income households. This reflects the fact that the tax only
and Education Reconciliation Act of 2010 (HCERA, P.L.
applies to those taxpayers with income (MAGI) above
111-152), shortly after the Patient Protection and
$200,000 if single or head of household and $250,000 if
Affordable Care Act (P.L. 111-148) was signed into law.
married filing jointly.
These two laws are commonly referred to as the Affordable
Care Act or ACA.
Table 1. Distribution of Net Investment Income Tax,
Policymakers may consider modifications to the NIIT to
raise revenue, address income inequality concerns, or both.
Repeal of the NIIT is also a policy option. This In Focus
provides an overview of the tax, presents data on the
Adjusted Gross Income
distribution of the tax, and considers several policy options.
Less than $100k
Overview of the NIIT
$100k under $200k
The NIIT is equal to 3.8% of the net investment income of
$200k under $500k
individuals, estates, and certain trusts. Net investment
income includes interest, dividends, annuities, royalties,
$500k under $1 mil ion
certain rents, and certain other passive business income not
subject to the corporate tax. Net investment income also
$1 mil ion under $2 mil ion
includes the amount of capital gain resulting from a home
$2 mil ion under $5 mil ion
sale that exceeds the amount that can be excluded from
taxation ($200,000 for single, $500,000 for married filed
$5 mil ion under $10 mil ion
jointly). Net investment income does not include wages,
$10 mil ion or more
unemployment compensation, nonpassive business income,
Social Security Benefits, alimony, tax-exempt interest, and
distributions from some tax-preferred retirement accounts;
Source: Internal Revenue Service, Statistics of Income, Table 3.3.
for example, 401(k)s, 403(b)s, and 457(b)s.
Table 1 shows taxpayers with income of $10 million or
The tax applies to taxpayers with modified adjusted gross
more paid over a third (35.7%) of the total NIIT collected in
income (MAGI) in excess of $200,000 if single or head of
2018. These individuals paid $518,845 in NIIT on average
household and $250,000 if married filing jointly ($125,000
in 2018. Table 1 also shows that those making between
for married filing separately). The income thresholds are
$200,000 and $500,000 accounted for the majority of
not adjusted annually for inflation. For taxpayers without
taxpayers (68.8%) subject to the 3.8% tax. The average
foreign-source income, MAGI generally equals adjusted
amount of NIIT paid by these taxpayers was $1,108 in
gross income (AGI). Hence, MAGI includes wages,
2018. Across all taxpayers subject to the NIIT in 2018, the
salaries, tips, and other compensation; dividend and interest
average amount of tax paid was $5,980.
income; business and farm income; realized capital gains ;
retirement distributions; and income from a variety of other
passive activities and certain foreign-earned income.
A number of options pertaining to the NIIT are available
depending on the objective of policymakers. One option is
For those subject to the NIIT, the amount of tax owed is
to leave the tax in its current form. The following discusses
equal to 3.8% multiplied by the lesser of
possible modifications to the tax.
net investment income, or
Eliminate the Tax
One option would be to eliminate the tax. This change
the amount by which their MAGI exceeds
would reduce the tax burden on investment, which, to the
extent investment is lower than it otherwise would be, could