Understanding the Net Investment Income Tax

If your income hits a certain level, you may face an additional wrinkle in calculating your taxes: the net investment income tax (also referred to as the unearned income Medicare contribution tax). This 3.8% Medicare tax applies to some or all of your net investment income if your modified adjusted gross income (MAGI) exceeds certain thresholds. The tax is in addition to any other income tax applicable to such income.

Note: If the net investment income tax applies, your long-term capital gains and qualified dividends may be subject to a combined federal tax rate of as much as 23.8% (the top long-term capital gains tax rate of 20% + 3.8%). Your other taxable investment income may be subject to a combined federal tax rate of as much as 40.8% (the top regular income tax rate of 37% + 3.8%). Your investment income may also be subject to state income tax.

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