What income levels does this come into play at?
Luckily, most people will never be affected by this tax. The tax is only triggered by income over $200,000 for single or head of household filers, $250,000 for married couples, and $125,000 for those who are married filing separately. After this income level is reached the tax is 3.8% of the lesser of the amount of passive income or the amount over the income threshold.
Who is most likely to be affected?
High income earners who are already in high tax brackets will easily get pushed into this territory, as will many foreign residents as this threshold is not lowered by the foreign earned income exclusion. Also, if you sell a property and have a large gain in a year, or a large recapture of depreciation, this may trigger the Net Income Investment Tax on all your passive income.
What can be done to minimize this?
If you are in the range already where this is an issue, then tax free muni bonds and investments in tax free accounts like defined contribution plans are well worth owning. If you are borderline it is important to minimize capital gains amounts by taking losses in the same year, or carrying gains from sales over a number of years with installment sales. You also can do a 1031 exchange to trade property without any taxable gain.
Is this worth worrying about?
For most people, the answer is no. Sometimes it is easy to get caught up in trying to avoid taxes and end up losing money, or not making enough gains as possible. It is best to remember that taxes are just another cost of doing business, and business decisions should be made based on other merits first, taxes are just one angle that should be considered.