One area where inflation hits taxpayers is the tax treatment of capital gains. When an asset is sold for a net gain, part of that gain is subject to taxation. The federal Net Investment Income tax (NIIT) can add another 3.8 percent. Combined federal, state, and local rates on short-term capital gains can exceed 40 percent. This is in addition to the 3.8% net Investment income tax they pay under the Affordable Care Act. It is important for taxpayers to understand how the NIIT works in order to plan accordingly.
The Net Investment Income tax (NIIT) is a tax levied on the net Investment income of taxpayers with an adjusted gross income (AGI) of over $200,000 (or $250,000 for joint filers). It is imposed on dividend income, interest income, capital gains, rental and royalty income, non-qualified annuity income, and income from businesses that are considered “pass-through” entities. It is important to note that the NIIT is not a tax on the actual item being sold, but rather the net Investment income.
I've recently learned that I am required to pay the IRS $28k USD, which is full attributed to the 3.8% Net Investment Income tax (NIIT). This was a surprise to me as I did not think this tax applied to me. It turns out that the NIIT is applicable to anyone who has an adjusted gross income (AGI) of over $200,000 (or $250,000 for joint filers). This means that anyone who is making more than these amounts will be subject to the NIIT.