IRC Section 1411: Who Pays, What Counts, How to Calculate

The net investment income tax is a 3.8 percent federal tax on investment earnings for individuals, estates, and trusts whose income crosses fixed thresholds set by IRC Section 1411. It has been in effect since January 1, 2013, and it applies on top of regular income tax. The rate hits only the smaller of two figures: your net investment income for the year, or the amount by which your modified adjusted gross income exceeds the threshold for your filing status.¹²

The thresholds are not indexed for inflation, so the tax reaches more filers every year as nominal incomes rise.²

Who Owes the Net Investment Income Tax

For individuals, the tax applies once modified adjusted gross income exceeds a threshold that depends on filing status. The figures were set in 2010 dollars and have never moved:

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

A household comfortably below the line a decade ago may now owe simply because wages and asset values have grown.²

Estates and Non-Grantor Trusts

Non-grantor trusts and estates owe the same 3.8 percent, but their threshold is far lower. The tax kicks in once the entity’s adjusted gross income exceeds the dollar amount where the top income tax bracket begins for that year. For 2026, that starts at just $16,000 of income.² Because of this, using a trust to shelter investment income from the NIIT is largely ineffective. Distributing income out to beneficiaries shifts the calculation to the individual, where the much higher thresholds apply.

Grantor trusts are not taxed at the entity level. The grantor reports the trust’s income personally and the individual thresholds apply.³ Charitable remainder trusts and other trusts whose unexpired interests are entirely devoted to charitable purposes are exempt.²

Nonresident Aliens

Nonresident aliens are exempt entirely. A nonresident alien who elects to file jointly with a U.S. citizen or resident spouse becomes subject to the tax under special rules in the final regulations. A dual-status individual who is a U.S. resident for only part of the year owes the tax only for the resident portion, and the threshold amount is not prorated.³

What Counts as Net Investment Income

The statute gathers three categories of income and lets you subtract properly allocable deductions.

Interest, Dividends, Rents, Royalties, and Annuities

The first bucket covers interest, dividends, annuity payments (nonqualified annuities included), royalties, and rental income. Income here is subject to the tax unless it comes from a trade or business in which you actively participate and which is not a passive activity or a financial trading business.²

Passive Business Income

The second category captures income from a business that qualifies as a passive activity under Section 469. If you own a share of a business and don’t materially participate, the income counts as net investment income. Rental real estate is the common example, along with limited partnership interests where your role is purely financial.¹ Income from a business that trades in financial instruments or commodities is also swept in, regardless of your level of participation.²

Net Gains from Selling Property

The third category is net gains on property sales, to the extent those gains are included in taxable income. Capital gains from stocks, bonds, mutual funds, and investment real estate all belong here. Gains from selling an interest in a partnership or S corporation count to the extent you were a passive owner.³

Gain on your primary residence gets special treatment. Any gain excluded under the standard home-sale exclusion ($250,000 single, $500,000 joint) is also excluded from net investment income. Only the taxable portion above those limits reaches the NIIT.¹

Income That Is Not Subject to the Tax

Several common income sources fall outside the NIIT entirely.

Wages and salaries are not investment income. High earners already pay a separate 0.9 percent Additional Medicare Tax on wages above the same thresholds. Self-employment income is likewise excluded because it is subject to self-employment tax, and the statute prevents the same income from being hit by both.¹

Unemployment compensation, Social Security benefits, and alimony are also excluded.¹

Distributions from qualified retirement plans do not count. That covers 401(k) plans, traditional and Roth IRAs, 403(b) plans, and 457(b) plans, and the regulations read the exception broadly to include all actual distributions from these arrangements.⁴ Roth conversions can be a useful planning tool for this reason: the conversion itself is taxable and may push your MAGI above the threshold in the year you convert, but future qualified Roth distributions escape both income tax and the NIIT.

Interest on tax-exempt municipal bonds is excluded from net investment income. Because it is already outside gross income, it also does not raise your MAGI, so it will not push you across the threshold.

Operating income from a nonpassive business is excluded. Active involvement is what pulls income out of the NIIT; passive ownership is what pulls it in.³

How the Tax Is Calculated

The NIIT is reported on Form 8960, attached to Form 1040 for individuals or Form 1041 for estates and trusts.⁵

Step 1: Modified Adjusted Gross Income

For most domestic filers, MAGI equals regular adjusted gross income. The only adjustment is for taxpayers who claim the foreign earned income exclusion under Section 911; those excluded amounts are added back.²

Step 2: Excess Over the Threshold

Subtract your filing-status threshold from your MAGI. If the result is zero or negative, you don’t owe the NIIT no matter how much investment income you earned.

Step 3: Apply 3.8 Percent to the Lesser Amount

The rate applies to the smaller of two numbers: your total net investment income, or the excess of your MAGI over the threshold.²

A worked example: a married couple filing jointly has $280,000 in MAGI and $60,000 of net investment income. Their excess over the $250,000 threshold is $30,000. The tax applies to $30,000, not $60,000, because $30,000 is the lesser amount. The NIIT is $1,140.

Deductions That Reduce Net Investment Income

Net investment income is not gross investment income. Form 8960 provides lines for investment interest expense, and the instructions allow deductions for state, local, and foreign income taxes allocable to investment income using any reasonable method, such as the ratio of investment income to total AGI.⁶

For 2026, miscellaneous itemized deductions suspended by the Tax Cuts and Jobs Act are scheduled to become deductible again, subject to the 2 percent of AGI floor. That would let investment advisory and management fees again reduce net investment income on Form 8960. Whether Congress extends the TCJA suspension is an open question.

Reducing Your Exposure

Because the tax hinges on two variables, MAGI and net investment income, planning aims at reducing either one below the threshold or reclassifying income from passive to active.

Material Participation

The single most effective move for a business owner is meeting the material participation tests under Section 469. Income from a business where you materially participate is not net investment income. For owners with several related businesses, a grouping election under the Section 469 regulations lets you treat multiple activities as a single economic unit, which can make participation easier to establish across the group.³ Once made, the grouping generally stays in place for later years unless a material change makes it clearly inappropriate, so the choice deserves careful thought upfront.

Real Estate Professionals

Rental real estate is generally passive and generally subject to the NIIT. If you qualify as a real estate professional and materially participate in your rentals, that income can be excluded. The Treasury regulations provide a safe harbor: participate in a rental real estate activity for more than 500 hours during the year, or more than 500 hours in any five of the preceding ten tax years, and the income from that activity falls outside the NIIT. Even without the safe harbor, you may still qualify by showing the activity rises to a trade or business in which you materially participate.

Timing and Roth Conversions

Because the threshold is annual, timing matters. Bunching capital gains into a lower-income year, or spreading a large gain across years through an installment sale, can keep MAGI below the threshold in some years. Converting traditional IRA assets to a Roth in lower-income years raises MAGI in the conversion year, but future qualified Roth distributions are excluded from both income tax and the NIIT calculation.⁴

Foreign Income Wrinkles

If you work abroad and claim the foreign earned income exclusion under Section 911, those excluded earnings are added back to your AGI when calculating MAGI for the NIIT. The exclusion cannot pull you below the threshold.²

Foreign tax credits are trickier. Under domestic law, foreign tax credits can only offset income tax imposed under Chapter 1 of the Internal Revenue Code. Because the NIIT sits in a separate chapter (Chapter 2A), foreign tax credits generally cannot reduce NIIT liability. Some U.S. tax treaties, however, contain provisions that override this restriction. In 2023, the Court of Federal Claims held in Christensen v. United States that U.S. citizens residing in France could apply foreign tax credits against the NIIT under certain treaty provisions. Similar language exists in other treaties, but the answer depends on the specific text.

Shareholders in controlled foreign corporations or passive foreign investment companies face additional complexity. The regulations under Section 1.1411-10 set out when CFC and PFIC income counts as net investment income, and include an optional election that lets shareholders include certain amounts in net investment income in the year of inclusion rather than the year of distribution.⁷ Once made, the election applies to all future years.

Estimated Payments and Filing

The NIIT is part of your total federal tax liability, so it belongs in your quarterly estimated payments or withholding. Ignore it and you may face an underpayment penalty at filing.

The standard safe harbors apply. You avoid the penalty by paying at least 90 percent of the current year’s tax or 100 percent of the prior year’s tax. If your AGI in the prior year exceeded $150,000 ($75,000 for married filing separately), the prior-year safe harbor rises to 110 percent. If you first encounter the NIIT because of a one-time gain, run a mid-year projection and adjust the fourth-quarter estimate, or raise withholding through your employer before year-end.

You must file Form 8960 if your MAGI exceeds the threshold for your filing status, even if net investment income turns out to be zero after deductions.⁶ The amount calculated on the form flows to total tax on Form 1040. Estates and trusts attach Form 8960 to Form 1041.⁵ Filers near the threshold or with mixed passive and active income should read the Form 8960 instructions closely or work with a tax professional who understands how the NIIT interacts with the rest of the return.

1
Internal Revenue Service. 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. Questions and Answers on the Net Investment Income Tax
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eCFR. 26 CFR 1.1411-8 – Exception for Distributions from Qualified Plans
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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. Instructions for Form 8960 Net Investment Income Tax – Individuals, Estates, and Trusts
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eCFR. 26 CFR 1.1411-10 – Controlled Foreign Corporations and Passive Foreign Investment Companies