The Net Investment Income Tax for US Expats

The Net Investment Income Tax (NIIT) is a 3.8% tax on net investment income for taxpayers with modified adjusted gross income above $200,000 ($250,000 for married filing jointly), and it applies to US citizens and residents regardless of where they live. Investment income subject to the NIIT includes interest, dividends, capital gains, passive rental income, and income from passive business activities, but it does not include wages, self-employment income, or income that is excluded under the Foreign Earned Income Exclusion. There is currently no credit against the NIIT for foreign income taxes paid on the same investment income, which means high-income expats in high-tax countries can sometimes end up paying the NIIT even after the Foreign Tax Credit wipes out their regular income tax. Capital gains from selling a foreign home may be subject to the NIIT if you do not qualify for the $250,000/$500,000 home sale exclusion, and passive rental income from foreign rental property is also potentially subject to the NIIT. Planning for the NIIT is part of any comprehensive expat tax strategy for those with significant investment income, since there are limited tools available to offset it.