The net investment income tax of 3.8%, which is additional to the regular income tax, covers more than Americans might think.

The 3.8% net investment income tax is broader than most American taxpayers think

The net investment income tax applies to single filers with modified adjusted gross incomes over $200,000, joint filers with modified adjusted gross incomes over $250,000, and married people filing separately with modified AGIs above $125,000.

There are many definitions of modified adjusted gross income under federal tax laws, but for this purpose, modified adjusted gross income is defined as adjusted gross income plus tax-free foreign-earned income.

The net investment income tax is due on the smaller net investment income tax, or the excess of modified adjusted gross income over the income thresholds. The net investment income tax includes what is commonly thought of as investment income, such as dividends, capital gains, taxable interest, annuities, royalties, and passive rental income.

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Trade or business income resulting through a passive activity is also net investment income tax

The net investment income tax is also present to business income provided that isn’t otherwise subject to self-employment tax. The test for determining a passive activity is material participation.

For this purpose, a trade or business qualifies as a passive activity if the American taxpayer doesn’t materially participate in the activity. In other words, trade or business income can be NII and subject to the 3.8% surtax for those American taxpayers who don’t materially participate in the activity.

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