How is the net investment income tax calculated?

The net investment income tax is specifically designed to target high earners by imposing an additional 3.8% tax on certain types of investment income. This tax applies to individuals, estates, and trusts that have a modified adjusted gross income above specific thresholds—$200,000 for single filers and $250,000 for married couples filing jointly, among others.

This tax is focused on net investment income, which includes income generated from interest, dividends, annuities, rents, royalties, and net gains from the sale of property, while excluding some categories such as wages. Thus, the correct understanding of how the net investment income tax is calculated involves recognizing it as an additional tax that activates at higher income levels rather than a flat rate imposed on all investment income or a progressive tax affecting lower-income brackets.