How to Calculate NIIT: MAGI, Investment Income, and Form 8960

To calculate the net investment income tax, take 3.8% of the smaller of two numbers: your net investment income for the year, or the amount by which your modified adjusted gross income (MAGI) exceeds the threshold for your filing status. The thresholds are $200,000 for single filers and heads of household, $250,000 for married couples filing jointly or a qualifying surviving spouse, and $125,000 for married filing separately.¹ The calculation lives on Form 8960, and the result flows to Schedule 2 of your Form 1040.

Congress set those thresholds in the statute in 2013 and never indexed them for inflation, so more households cross them each year even without a real change in wealth.

Step 1: Check Your MAGI Against the Threshold

If your MAGI doesn’t exceed the threshold for your filing status, you owe no NIIT and don’t need to go further. For most taxpayers, MAGI is the same number as the adjusted gross income on the face of your Form 1040.²

The two figures diverge only in narrow situations. If you claimed the foreign earned income exclusion on Form 2555, you add that excluded income back to reach your MAGI. Certain adjustments related to controlled foreign corporations and passive foreign investment companies also apply.³ Without those, AGI and MAGI are identical.

Subtract the threshold from your MAGI. The result is the first candidate for the base of the tax. Hold that number.

Step 2: Total Your Investment Income

Net investment income starts with everything the statute treats as investment income:¹

Interest and dividends
Annuities, royalties, and rents, unless earned from a business where you materially participate
Capital gains from selling stocks, bonds, mutual funds, or investment real estate
Income from passive business activities and from businesses that trade financial instruments or commodities
Net gains from the sale of partnership or S corporation interests, to the extent taken into account in computing taxable income²

Several income types stay out. Wages, salaries, tips, Social Security benefits, and unemployment compensation are not investment income. Distributions from qualified retirement accounts, including 401(k)s, traditional and Roth IRAs, 403(b)s, and 457(b) plans, are explicitly excluded.¹ Self-employment income that’s already subject to the self-employment tax is also excluded.⁴

Business income is the trickiest category. A trade or business produces NII only when the activity is passive to you, meaning you don’t materially participate. The clearest test is logging more than 500 hours in the activity for the year.⁵ Rental real estate income is generally passive regardless of hours, with a narrow exception for taxpayers who qualify as real estate professionals under the 750-hour test in Section 469.

Step 3: Subtract Deductions Allocable to Investment Income

Before the 3.8% rate hits, you reduce your investment income by deductions properly allocable to it. The two most common:

Investment interest expense. If you borrowed to purchase investments and deducted the interest on Schedule A, line 9, you can also claim it on Form 8960, line 9a. Don’t double-count: if the same expense already flows through Schedule E into line 4a of Form 8960, leave it off line 9a.⁶

State and local income taxes allocable to your investment income go on line 9b. The Form 8960 instructions note that these taxes may be subject to the same limitations that apply on Schedule A unless they relate to a trade or business or an income-producing activity.⁶

One category is gone entirely. Investment advisory fees and tax preparation costs were miscellaneous itemized deductions subject to the 2% floor, and their suspension, originally part of the 2017 tax overhaul, was made permanent by the One, Big, Beautiful Bill Act signed into law on July 4, 2025.⁷ They are no longer deductible for any purpose, including the NIIT calculation.

Total investment income minus these deductions equals your net investment income. That’s the second candidate for the base of the tax.

Step 4: Compare the Two Numbers and Apply 3.8%

Line up the two numbers you’ve built:

Number 1: Your net investment income
Number 2: Your MAGI minus your filing status threshold

Take the smaller one and multiply by 3.8%.¹

Example A. You’re single with $230,000 MAGI and $15,000 in net investment income. Your MAGI exceeds the $200,000 threshold by $30,000. Because $15,000 is less than $30,000, you pay 3.8% on $15,000. Tax: $570.

Example B. Same filing status and MAGI, but $50,000 in net investment income. Your excess over the threshold is still $30,000, and $30,000 is less than $50,000. You pay 3.8% on $30,000. Tax: $1,140, not $1,900. The formula limits the tax to the portion of investment income that overlaps with income above your threshold.

Where Each Number Lands on Form 8960

Form 8960 has three working parts that mirror the steps above.⁸

Part I (Lines 1–8): Investment Income. Line 1 for taxable interest, line 2 for ordinary dividends, line 3 for annuities, lines 4a–4c for rental real estate, royalties, partnership, and S corporation income from passive or trading activities, lines 5a–5d for net gain or loss from selling property, lines 6 and 7 for adjustments, and line 8 for the total.

Part II (Lines 9–11): Deductions. Lines 9a through 9d handle investment interest expense, state and local income taxes, and other allocable deductions. Line 10 covers additional modifications. Line 11 totals your deductions.⁶

Line 12: Net Investment Income. Line 8 minus line 11. This is the first of the two comparison numbers.

Part III (Lines 13–17 for individuals). Line 13 is your MAGI, line 14 your threshold, line 15 the excess of MAGI over threshold, line 16 the lesser of line 12 or line 15, and line 17 multiplies that amount by 3.8%. The result carries to Schedule 2 (Form 1040), line 12.⁶

Selling Your Home

Selling your primary residence doesn’t automatically feed the NII total. The Section 121 exclusion lets you exclude up to $250,000 of gain, or $500,000 for married couples filing jointly, if you owned and used the home as your main residence for at least two of the five years before the sale.⁹ Only the taxable portion of the gain, meaning the amount above the exclusion, flows into Form 8960. If the whole gain fits inside the exclusion, none of it is NII. Depreciation recapture on a home you previously rented doesn’t qualify for the exclusion and does count toward NII.

Estates and Trusts Use Different Numbers

The calculation structure is the same for estates and non-grantor trusts, but the threshold is dramatically lower. An estate or trust triggers the NIIT when its adjusted gross income exceeds the dollar amount where the highest fiduciary income tax bracket begins, which is $16,000 for 2026.¹⁰

The tax is 3.8% of the lesser of:

The estate or trust’s undistributed net investment income, or
The excess of AGI over $16,000

The word “undistributed” does most of the work. Investment income that passes out to beneficiaries through deductible distributions leaves the trust’s NII figure and lands on the beneficiary’s return, where the individual thresholds apply.¹ Trusts where all unexpired interests are devoted to charitable purposes are exempt from the NIIT.¹⁰

Paying the Tax

The NIIT is due with the rest of your income tax by the filing deadline. For 2025 returns, that’s April 15, 2026.¹¹ A filing extension does not extend the payment deadline.

The tax is also subject to the estimated tax rules, so if you expect to owe it, factor the amount into your quarterly payments.¹² The safe harbor lets you avoid an underpayment penalty if you pay at least the lesser of 90% of the current year’s total tax or 100% of the prior year’s total tax, with the prior-year percentage rising to 110% if your prior-year AGI exceeded $150,000, or $75,000 if married filing separately.¹³ Taxpayers whose regular income tax is fully covered by wage withholding sometimes miss that they still need to make separate estimated payments to cover NIIT on their investment income.

1
Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
2
Internal Revenue Service. Topic No. 559, Net Investment Income Tax
3
Internal Revenue Service. Modified Adjusted Gross Income
4
eCFR. 26 CFR 1.1411-9 – Exception for Self-Employment Income
5
Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited
6
Internal Revenue Service. Instructions for Form 8960 (2025)
7
Internal Revenue Service. One, Big, Beautiful Bill Provisions
8
Internal Revenue Service. Form 8960 – Net Investment Income Tax, Individuals, Estates, and Trusts
9
Internal Revenue Service. Topic No. 701, Sale of Your Home
10
Internal Revenue Service. 2026 Form 1041-ES – Estimated Income Tax for Estates and Trusts
11
Internal Revenue Service. Pay Taxes on Time
12
Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
13
Office of the Law Revision Counsel. 26 USC 6654 – Failure by Individual to Pay Estimated Income Tax