Net Investment Income Tax (NIIT): The 3.8% Rules and How to File

The Net Investment Income Tax is a flat 3.8% surtax on the smaller of two numbers: your net investment income for the year, or the amount your modified adjusted gross income (MAGI) exceeds the threshold for your filing status. Those thresholds are $200,000 for single filers and heads of household, $250,000 for married couples filing jointly, and $125,000 for married filing separately.¹ If your MAGI sits below the threshold for your filing status, you owe nothing, no matter how much investment income you earned.

How the 3.8% Is Calculated

The tax applies the 3.8% rate to whichever of these two figures is smaller:

Your net investment income (investment-type income minus allocable deductions).
The amount your MAGI exceeds the threshold for your filing status.

Someone who earns well above the threshold but has little investment income pays only on the investment income. Someone barely above the threshold with large investment income pays only on the MAGI excess. The tax always lands on the smaller target.²

The MAGI thresholds have never been adjusted for inflation since the tax took effect in 2013, and nothing in the statute provides for future adjustments.³ More taxpayers cross these lines each year as wages and investment returns grow.

For most people, MAGI for NIIT purposes is identical to the adjusted gross income on their return. It only diverges if you’ve claimed the foreign earned income exclusion under Section 911, in which case the excluded foreign income is added back.⁴

Income That Counts

Net investment income covers most forms of income you didn’t actively work for. The main categories are interest, dividends, capital gains, rental and royalty income, non-qualified annuities, and income from passive business activities.² Capital gains from selling stocks, bonds, mutual funds, and real estate all count to the extent they’re included in your taxable income.⁴

Income from a business you don’t actively run is also included. If you own a piece of a partnership or S corporation but don’t materially participate in day-to-day operations, income from that interest counts. Income from trading in financial instruments or commodities is included regardless of whether you consider it an active business, because the statute specifically pulls that category in.¹

Income the Tax Doesn’t Reach

Several common income types are entirely outside the NIIT. Wages, unemployment compensation, Social Security benefits, alimony, and most self-employment income are all excluded.² Tax-exempt municipal bond interest, Veterans Administration benefits, and income from a business where you materially participate are also excluded.⁴

The home sale exclusion under Section 121 carries over. If you sell your primary residence, the first $250,000 of gain ($500,000 for married couples filing jointly) that’s excluded from your regular income tax is also excluded from net investment income. Only gain above the exclusion enters the calculation.³

Nonresident aliens don’t owe the NIIT at all. A dual-status individual who’s a U.S. resident for only part of the year owes the tax only for the resident portion.³

Rental real estate is typically treated as passive and therefore included. A narrow exception exists for taxpayers who qualify as real estate professionals under the material participation rules in Publication 925, which can pull rental income out of the NIIT entirely.⁵

Deductions That Reduce Net Investment Income

You don’t pay 3.8% on gross investment income. The statute allows you to subtract deductions properly allocable to that income.¹ The IRS identifies several categories: investment interest expense, investment advisory and brokerage fees, expenses related to rental and royalty income, tax preparation fees, fiduciary expenses for estates and trusts, and state and local income taxes.³

The key word is allocable. If you pay state income taxes on both wages and investment income, only the portion attributable to investment income reduces your NII. The same goes for tax preparation fees or advisory costs that cover both investment and non-investment matters. If you deduct foreign income taxes instead of taking the foreign tax credit, some or all of that deduction may also reduce NII.³

A Worked Example

Consider a single filer with $240,000 in MAGI and $60,000 of net investment income. The MAGI excess is $40,000 ($240,000 minus the $200,000 threshold). Since $40,000 is less than $60,000, the tax applies to $40,000. The NIIT is $40,000 × 3.8% = $1,520.

Flip it. A single filer with $240,000 in MAGI but only $15,000 in NII still has a $40,000 MAGI excess, but the NII is only $15,000. The tax applies to the smaller figure: $15,000 × 3.8% = $570.²

Home sales trip people up. Say a single filer earns $210,000 in wages and sells a home she’s lived in for ten years, realizing $400,000 in gain. The Section 121 exclusion removes $250,000, leaving $150,000 of recognized gain that counts as NII. Her MAGI is $360,000, so the MAGI excess is $160,000. The tax applies to the smaller figure: $150,000 × 3.8% = $5,700. If instead her MAGI after the exclusion had been only $195,000, she’d owe nothing because she’d be below the $200,000 threshold.³

Trusts and Estates

Trusts and estates owe the 3.8% tax too, at a dramatically lower threshold. Instead of the $200,000–$250,000 brackets individuals get, a trust or estate hits the NIIT once its adjusted gross income exceeds the dollar amount where the highest income tax bracket begins. For 2026, that’s just $16,000.⁶

The tax applies to the lesser of the trust’s or estate’s undistributed net investment income or the AGI excess over that threshold.¹ The word “undistributed” matters. Income the trust distributes to beneficiaries leaves the trust’s calculation and potentially enters the beneficiaries’ individual NIIT calculations. A trust that accumulates income will almost certainly hit the threshold. Estates and trusts report the tax on Form 1041 rather than Form 1040.⁴

Reporting and Paying

The NIIT is calculated on Form 8960, which walks through each piece of the formula: gross investment income on Part I, allocable deductions on Part II, and the final tax computation on Part III.⁷ For individual filers, the resulting tax transfers from Form 8960 to Schedule 2 (Form 1040), Line 12. Schedule 2 then feeds into Line 23 of Form 1040.⁸

Unlike wages, investment income usually has no automatic withholding for the NIIT. If investment income is a regular part of your financial picture, plan ahead to avoid an underpayment penalty. One option is to increase your wage withholding by filing an updated Form W-4 with extra withholding in Step 4(c). The W-4 instructions specifically mention the Net Investment Income Tax as a reason to use the IRS withholding estimator.⁹

The other approach is quarterly estimated tax payments. The 2026 deadlines for calendar-year filers are April 15, 2026; June 15, 2026; September 15, 2026; and January 15, 2027. The fourth-quarter payment isn’t required if you file your 2026 return by February 1, 2027, and pay the full balance due with the return.¹⁰

Avoiding Underpayment Penalties

Taxpayers who discover NIIT liability only at filing time often face an underpayment penalty on top of the tax. The penalty rate is based on the federal short-term interest rate plus three percentage points, which for the first quarter of 2026 is 7%, compounded daily.¹¹

You can avoid the penalty entirely if your total balance due at filing is under $1,000. Failing that, you’re safe if you paid at least 90% of the current year’s tax liability or 100% of the prior year’s, whichever is less. For higher earners with prior-year AGI above $150,000 ($75,000 if married filing separately), that 100% figure increases to 110%.¹² Most people subject to the NIIT already exceed the $150,000 AGI level, so the 110% safe harbor is the one that matters in practice. If your income is volatile year to year, paying 110% of last year’s total tax through withholding or estimated payments keeps you penalty-free regardless of how much NIIT you end up owing.

1
Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
2
Internal Revenue Service. Net Investment Income Tax
3
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
5
Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules
6
Internal Revenue Service. 2026 Form 1041-ES Estimated Income Tax for Estates and Trusts
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Internal Revenue Service. Form 8960 Net Investment Income Tax – Individuals, Estates, and Trusts
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Internal Revenue Service. 2025 Instructions for Form 8960 – Net Investment Income Tax
9
Internal Revenue Service. Form W-4 – Employee’s Withholding Certificate (2026)
10
Internal Revenue Service. 2026 Form 1040-ES Estimated Tax for Individuals
11
Internal Revenue Service. Quarterly Interest Rates
12
Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty