For the 2025 U.S. federal tax year, a single taxpayer has modified adjusted gross income (MAGI) of $220,000, including $30,000 of net investment income. Under IRC Section 1411, how is the 3.8% Net Investment Income Tax (NIIT) computed?
- On the lesser of net investment income ($30,000) or the amount by which MAGI exceeds the $200,000 single-filer threshold ($20,000), so the 3.8% tax applies to $20,000
- On the full $30,000 of net investment income, regardless of MAGI
- On the full $220,000 of MAGI, because it exceeds the threshold
- The NIIT does not apply, because MAGI is below the $250,000 threshold that applies to every filing status
Correct answer: A. On the lesser of net investment income ($30,000) or the amount by which MAGI exceeds the $200,000 single-filer threshold ($20,000), so the 3.8% tax applies to $20,000
Under IRC Section 1411, the 3.8% NIIT applies to the lesser of an individual's net investment income or the excess of MAGI over the statutory threshold for their filing status; for a single filer the threshold is $200,000, so with MAGI of $220,000 the excess is $20,000, which is less than the $30,000 of net investment income, making $20,000 the taxable base. The second option is wrong because the tax is capped at the MAGI-excess amount when that figure is smaller than net investment income, not applied to the full investment income figure regardless of MAGI. The third option is wrong because NIIT is never assessed on total MAGI; it is assessed only on the lesser-of amount described above. The fourth option is wrong because $250,000 is the threshold for married filing jointly and qualifying surviving spouse, not for single filers, whose threshold is $200,000 and is not indexed for inflation.
Source: Internal Revenue Code Section 1411; IRS Topic no. 559, Net investment income tax; 2025 Instructions for Form 8960