How to Calculate NIIT: MAGI, Lesser-Of Rule, and Form 8960

To calculate the Net Investment Income Tax, multiply 3.8% by the lesser of two figures: your net investment income, or the amount by which your modified adjusted gross income exceeds the threshold for your filing status. That single “lesser of” comparison is the whole calculation. Everything else is figuring out the three numbers that feed it: your filing-status threshold, your MAGI, and your net investment income.¹

Find Your Filing-Status Threshold

The NIIT only applies once your MAGI crosses a fixed dollar line set by statute:

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

These figures are not indexed for inflation and have not moved since the tax took effect in 2013.¹ If your MAGI is at or under the threshold for your status, the calculation stops here and you owe nothing. Nonresident aliens are exempt from the tax entirely.²

Calculate Your MAGI

For the NIIT, modified adjusted gross income equals your adjusted gross income plus any foreign earned income you excluded under Section 911. If you did not claim the foreign earned income exclusion, your MAGI is simply the AGI from your return.³

One point that trips people up: retirement account distributions are not net investment income, but they do count in MAGI. A large traditional IRA or 401(k) withdrawal can push your MAGI over the threshold and expose your other investment income to the 3.8%, even though the distribution itself never enters the NII bucket.²

Build Your Net Investment Income

Net investment income is gross investment income minus the deductions properly allocable to it. Get the gross figure right first.

What Goes In

Section 1411 pulls in interest, dividends, annuities, royalties, and rents, plus net capital gains from sales of assets like stocks or real estate. It also includes income from two categories of business activity: passive activities where you do not materially participate, and businesses that trade in financial instruments or commodities.⁴ If you receive a Schedule K-1 from a partnership, information you need for the NIIT calculation is reported in Box 20 under Code Y, and gain on the sale of a partnership interest can also count.⁵

What Stays Out

Several income types look like investment income but do not belong in the NII total:

Distributions from 401(k) plans, traditional and Roth IRAs, 403(b) plans, and 457(b) plans.²
Self-employment income from a business you actively run. Above the same thresholds, that income faces the 0.9% Additional Medicare Tax instead.²
Wages, unemployment compensation, and Social Security benefits.
Gain on the sale of your primary residence that is excluded under Section 121, up to $250,000 single or $500,000 joint if you owned and lived in the home for at least two of the five years before the sale. Any gain above the exclusion is included.⁶

Subtract Allocable Deductions

Not every investment-related expense is deductible against NII. Three categories are available regardless of what Congress does with the Tax Cuts and Jobs Act:

Investment interest expense on money borrowed to buy taxable investments.
State, local, and foreign income taxes attributable to your NII, plus real property and personal property taxes tied to NII, allocated by any reasonable method.
Expenses tied to rental and royalty income reported on Schedule E, and tax advice costs related to that property under Section 62(a)(4).⁷

Miscellaneous itemized deductions subject to the 2% AGI floor, including investment advisory fees, brokerage account fees, custodial fees, and the investment-related portion of tax preparation costs, are suspended under the TCJA and disallowed on the 2025 Form 8960.⁷ If the TCJA individual provisions expire as scheduled after 2025, those deductions return for tax year 2026.⁸ Check the current-year instructions before filing.

Gross investment income minus these allocable deductions equals your net investment income.

Run the Lesser-Of Calculation

With your three numbers in hand, subtract your threshold from your MAGI. Compare that excess to your net investment income. The smaller figure is your taxable base. Multiply it by 3.8%.¹

A worked example. A single filer has MAGI of $250,000 and net investment income of $80,000.

MAGI excess over threshold: $250,000 − $200,000 = $50,000
Net investment income: $80,000
Lesser of the two: $50,000
NIIT: $50,000 × 3.8% = $1,900

Same filer, same $250,000 MAGI, but only $30,000 in net investment income. The MAGI excess is still $50,000, but net investment income is the smaller number. The tax is $30,000 × 3.8% = $1,140. Because the formula always uses the lesser figure, you never pay 3.8% on more investment income than you actually have.

A married couple filing jointly with $300,000 MAGI and $120,000 net investment income: the MAGI excess is $50,000, the NII is $120,000, and the lesser is $50,000. Tax owed: $1,900.⁴

How Estates and Trusts Calculate the Tax

Estates and trusts pay the same 3.8% rate, but the threshold is far lower and the base is different. The tax applies when adjusted gross income exceeds the dollar amount where the top trust income tax bracket begins. For 2025 that figure is $15,650; the 2026 amount is inflation-adjusted and depends on which bracket structure applies, so pull the number from the current-year Form 1041 instructions.⁹

The tax applies only to undistributed net investment income. Investment income distributed to beneficiaries leaves the entity’s calculation and lands on the beneficiary’s own return, reported using Code H in Box 14 of Schedule K-1 (Form 1041). NII allocated to a Section 642(c) charitable deduction also reduces the entity’s undistributed NII. Bankruptcy estates are a separate case and use the $125,000 married-filing-separately threshold.⁹

Report the Result on Form 8960

Form 8960 carries the calculation and attaches to your Form 1040 or Form 1041.¹⁰ It has three parts that mirror the steps above.

Part I is the income side. Enter interest, dividends, annuities, royalties, rents, net capital gains, and income from passive activities or financial trading businesses on their respective lines, then total to gross investment income.

Part II is the deduction side. Enter investment interest expense, state and local taxes allocable to NII on Line 9b, rental and royalty expenses, and any other properly allocable deductions available for the year. The form subtracts these from gross investment income to produce net investment income on Line 8.¹¹

Part III runs the lesser-of comparison. Enter your MAGI, subtract your filing-status threshold, compare that excess to your Line 8 NII, and multiply the smaller number by 3.8%. The result transfers to your Form 1040. For estates and trusts, Part III uses undistributed NII and the trust-bracket threshold, and the tax flows to Schedule G, Line 5 of Form 1041.⁹ Download the current-year form and instructions each filing season, since line numbers and available deductions can shift.

Cover the Liability Through Estimated Payments

The NIIT is subject to estimated tax rules. If you expect to owe, build it into your quarterly estimates or increase W-2 withholding.² A year with unusually large capital gains or a big passive income event can produce an underpayment penalty for someone whose wage withholding has always been enough before. If your investment income was uneven across the year, the annualized income installment method on Schedule AI of Form 2210 can align payments with when the income actually landed.

1
Internal Revenue Service. Net Investment Income Tax
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Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
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Internal Revenue Service. Topic No. 559, Net Investment Income Tax
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Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
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Internal Revenue Service. Partner’s Instructions for Schedule K-1 (Form 1065) (2025)
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Office of the Law Revision Counsel. 26 U.S. Code 121 – Exclusion of Gain From Sale of Principal Residence
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Internal Revenue Service. Instructions for Form 8960 (2025) – Section: Part II Investment Expenses Allocable to Investment Income and Modifications
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Tax Foundation. How 2026 Tax Brackets Would Change if the TCJA Expires
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Internal Revenue Service. Instructions for Form 1041 and Schedules A, B, G, J, and K-1 (2025)
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Internal Revenue Service. About Form 8960, Net Investment Income Tax Individuals, Estates, and Trusts
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Internal Revenue Service. Form 8960