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Concept · Tax in investing

What is the 3.8% net investment income tax?

Direct answer A federal surtax of 3.8% on investment income (interest, dividends, capital gains, rents) for single filers above $200,000 and joint filers above $250,000 of modified adjusted gross income. The thresholds are not indexed. It applies on top of both the 20% long-term rate and the 37% ordinary rate.

It is the middle layer of every rate on this site: 20 + 3.8 + 11.3 = 35.1% on a long-term gain for a top-bracket Californian, 37 + 3.8 + 11.3 = 52.1% on a short-term one. California has no equivalent. Read what a dollar of gain keeps after tax.

Sources

  1. IRC §1411law.cornell.edu
  2. IRS, Net Investment Income Tax FAQsirs.gov

Used in

The dividend tax no wrapper removes An index ETF defers its capital gains almost completely. It cannot defer its dividends. At a 1.3% yield and a 35% rate, that is 46 basis points a year, and it is most of the ETF's remaining tax drag. What a dollar of gain keeps after tax Sell a winner at the top California bracket and 35 cents of every dollar of gain goes to tax. Sell it inside a year and 52 cents go. Where those two numbers come from.

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Holding periodQualified dividend

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