How is the net investment income tax computed?

The net investment income tax (NIIT) is calculated based on the lesser of two amounts: the excess of modified adjusted gross income (MAGI) over a specified threshold, or the taxpayer’s net investment income (NII). This design helps ensure that the tax specifically targets those individuals whose additional income from investments contributes to their overall financial profile beyond a certain point.

By considering the lesser of these two figures, the NIIT effectively limits the tax burden to those who not only have higher income but also engage in generating net investment income. This approach prevents taxing individuals who may have a high MAGI but negligible investment income from facing an undue tax liability, thus aligning the tax more closely with the taxpayer's actual investment gains.

The choice that states the lesser amount reflects the intention behind the NIIT, emphasizing the relationship between overall income and net investment income in determining tax responsibility.