The 'You-Make-A-Lot-of-Money Tax' Hits More Americans [View all]

Many Americans don’t know Uncle Sam has an extra tax on investment income for higher earners—at least until they owe it. Now more people are owing it, thanks to inflation and higher yields on bank accounts and bonds.

This levy is called the net investment income tax, or NIIT for short. It’s a 3.8% surtax on a filer’s income from sources like interest, dividends and capital gains that applies if adjusted gross income, or AGI, is above $200,000 for most single filers or $250,000 for most married couples. It affects one-time spikes as well as recurring income, so taxpayers who typically earn less can owe it on a windfall.

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And the NIIT’s reach is expanding. When lawmakers enacted it to help fund the Obamacare health-coverage expansion, they chose not to adjust the $200,000/$250,000 thresholds for inflation to collect more tax.

As a result, NIIT revenue has more than tripled since the tax took effect in 2013, rising from $16 billion to more than $60 billion in 2021, according to the Internal Revenue Service’s latest data. Over that period the number of taxpayers owing it more than doubled, from about 3 million to about 7 million. Had the $200,000/$250,000 thresholds been indexed for inflation, they would be closer to $264,000 and $330,000.

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The 3.8% surtax applies to net capital gains on asset sales (including cryptocurrency), dividends, interest (including on CDs and bank accounts) and royalties, among other things. It also applies to net gains on the sale of a home above the exemption of $250,000 for single filers and $500,000 for joint filers. Rental income can be subject to the tax as well, unless it’s from an actively managed real-estate business.

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