Form 8960 Net Investment Income Tax: Thresholds, Deductions, and the 3.8% Rate

To fill out Form 8960, you work through three short parts: Part I totals your investment income, Part II subtracts the deductions properly allocable to it, and Part III applies the 3.8% Net Investment Income Tax to the smaller of your net investment income or the amount your modified adjusted gross income exceeds the threshold for your filing status. Attach the finished form to your Form 1040 (or Form 1041 for an estate or trust) and carry the tax to Schedule 2, line 12.¹

You only file the form if two things are true at once: you have net investment income, and your MAGI exceeds the threshold for your filing status. Having investment income alone is not enough.²

Check the Threshold First

The individual thresholds have not moved since the tax took effect in 2013, and the statute contains no inflation-indexing provision:³

Married filing jointly or qualifying surviving spouse: $250,000
Married filing separately: $125,000
Single or head of household: $200,000

For most filers, MAGI equals the adjusted gross income shown on Form 1040. The one common adjustment is for taxpayers claiming the foreign earned income exclusion on Form 2555, who must add back the excluded amount.² Nonresident aliens do not owe the NIIT.¹ Estates and trusts follow a different rule: the tax kicks in when adjusted gross income exceeds the dollar amount at which the highest trust bracket begins, which is $16,000 for 2026.⁴

If your MAGI is below the threshold, stop here. You don’t need to file the form.

Documents to Pull Before You Start

Several lines on Form 8960 draw directly from other schedules, so having everything in one stack saves you from bouncing back and forth:⁵

Form 1099-INT for interest
Form 1099-DIV for dividends
Form 1099-B for broker sales
Schedule K-1 from any partnership, S corporation, estate, or trust
Closing statements for any real estate sold during the year
Completed Schedules C, D, E, and F from your Form 1040
Records of investment interest, brokerage fees, and state or local taxes tied to investment income

Part I: Total Your Investment Income

Part I gathers gross investment income across eight lines.⁶

Line 1 takes taxable interest straight from your Form 1040. Tax-exempt interest, such as municipal bond interest, stays off the form entirely. Line 2 takes total ordinary dividends, not just the qualified portion. Line 3 captures the taxable portion of annuity distributions.

Lines 4a and 4b are where most errors happen. Line 4a pulls the combined rental, royalty, partnership, S corporation, and trade or business totals from Schedules C, E, and F. Line 4b is a negative adjustment that removes income from any business in which you materially participate and that isn’t a trading business. Forgetting to back out active business income on 4b, or accidentally backing out passive income that should stay in, is the most common mistake on the form.

Lines 5a through 5d handle gains and losses from property. Line 5a starts with your net gain or loss from dispositions, 5b removes gains not subject to NIIT, and 5c reports the adjustment for selling a partnership interest or S corporation stock — that calculation needs its own worksheet from the instructions.¹ Lines 6 and 7 handle CFC/PFIC adjustments and other modifications; most domestic-only filers leave them blank. Line 8 is the sum.

A few items to watch as you fill in Part I. Wages and self-employment income are excluded by statute, because they already carry payroll tax under Section 1401(b).² Social Security benefits, unemployment compensation, and tax-exempt interest are also out. If you sold your primary residence, the gain excluded under Section 121 ($250,000 single, $500,000 joint) is excluded here too, but any taxable gain above that ceiling counts as investment income.³ A long-held home in an appreciating market can push a large number onto line 5a.

Part II: Subtract Allocable Deductions

Part II reduces gross investment income to the net figure. Only deductions that are allowed for regular income tax and properly allocable to investment income can appear here.⁷

Line 9a is investment interest expense — the deductible portion of interest on money borrowed to buy investments, as calculated on Form 4952. Line 9b is the share of state, local, and foreign income taxes attributable to your net investment income, along with real property and personal property taxes tied to that income.

Line 9c, miscellaneous investment expenses, is effectively dead. The One Big Beautiful Bill Act (P.L. 119-21, Section 70110) made permanent the disallowance of miscellaneous itemized deductions that had been suspended since 2018. Because those deductions are no longer allowed for regular income tax, they cannot reduce net investment income either.⁷ Investment advisory fees, tax preparation costs allocable to investment income, and similar expenses no longer trim the NIIT bill.

Line 10 is a catch-all for additional deductions, such as certain Section 62 items related to rental or royalty activity.

Part III: Apply the 3.8% Rate

Part III is short and mechanical for individuals.¹

Line 11: net investment income (Part I total minus Part II deductions).
Line 13: your MAGI. For most filers, this is the AGI from Form 1040.
Line 14: the threshold for your filing status — $250,000, $200,000, or $125,000.
Line 15: line 13 minus line 14. If zero or negative, you owe no tax.
Line 16: the smaller of line 11 or line 15.
Line 17: line 16 multiplied by 3.8%. That is your NIIT.

Move the amount from line 17 to Schedule 2 (Form 1040), line 12. Estates and trusts follow a parallel set of lines in Part III with the trust-bracket threshold in place of the fixed individual figures.⁴

Material Participation Can Shrink Line 4a

The single biggest lever over what lands on Form 8960 is material participation. Income from a trade or business in which you materially participate stays off the form (unless the business trades financial instruments or commodities). Without material participation, the activity is passive and its income flows into net investment income.

Section 469 regulations give seven tests for material participation, and meeting any one is enough.⁸ The one most taxpayers rely on is straightforward: participation of more than 500 hours in the activity during the year. Other routes include participating substantially all of any individual’s participation in the activity, participating more than 100 hours when no one else participated more, and meeting a five-of-ten-years history for the same activity.

Keep a contemporaneous log of your hours. The IRS challenges material participation claims, and reconstructing hours after the fact rarely holds up. If you hold interests in multiple businesses, you can also regroup your activities for NIIT purposes by attaching a statement to your return, which can combine hours across activities to clear the 500-hour bar.⁹

Filing and Paying

Attach the completed Form 8960 to your Form 1040 or 1040-SR (Form 1041 for an estate or trust). If you e-file, your tax software transmits it as part of the return; paper filers include the physical form in the mailed package. The tax is due on the same date as the rest of your income tax, generally April 15 for individuals. You can pay through IRS Direct Pay, EFTPS, or by mailed check or money order.¹⁰ Unpaid balances accrue a failure-to-pay penalty of 0.5% per month, capped at 25%.¹¹

Don’t Forget Estimated Payments

Wage withholding does not cover the NIIT, which catches many first-time filers. If you expect to owe it, account for it in your quarterly estimated payments or increase withholding on Form W-4. The safe harbor for avoiding an underpayment penalty applies to your total tax including the NIIT: pay at least 90% of the current year’s tax or 100% of the prior year’s, whichever is smaller. If your prior-year AGI exceeded $150,000 ($75,000 if married filing separately), the prior-year safe harbor rises to 110%.¹² Either method works; the IRS cares only that enough arrives on time.

1
Internal Revenue Service. Instructions for Form 8960 Net Investment Income Tax — Individuals, Estates, and Trusts
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Office of the Law Revision Counsel. 26 U.S. Code 1411 – Imposition of Tax
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Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
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Internal Revenue Service. Rev. Proc. 2025-32
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Internal Revenue Service. About Form 8960, Net Investment Income Tax
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Internal Revenue Service. Net Investment Income Tax — Individuals, Estates, and Trusts (Form 8960)
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Internal Revenue Service. Instructions for Form 8960 (2025)
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eCFR. 26 CFR 1.469-5T – Material Participation (Temporary)
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Internal Revenue Service. Publication 925
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Internal Revenue Service. EFTPS: The Electronic Federal Tax Payment System
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Internal Revenue Service. Failure to Pay Penalty
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Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty