The net investment income tax is a 3.8% federal surtax on investment earnings that kicks in once your modified adjusted gross income (MAGI) crosses a threshold set by your filing status. The rate is 3.8%. The thresholds are $200,000 for single filers, $250,000 for married couples filing jointly, and $125,000 for married filing separately. You pay the tax on the smaller of two numbers: your net investment income for the year, or the amount by which your MAGI exceeds your threshold. The rate, the categories of income, and the thresholds themselves are unchanged for 2026.
Who Owes It
You owe the tax only if two things are true in the same year: you have net investment income, and your MAGI is above the threshold for your filing status. The thresholds sit in Section 1411 of the Internal Revenue Code:
- Married filing jointly or qualifying surviving spouse: $250,000
- Single or head of household: $200,000
- Married filing separately: $125,000
These figures are written into the statute and are not indexed to inflation, so they haven’t moved since the tax took effect on January 1, 2013.1Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax As wages and portfolio values rise, more households cross the line each year, so it’s worth rechecking your position even if you’ve historically been below.
Estates and trusts also owe the 3.8% tax, but on undistributed net investment income and at a much lower threshold: the income level where the top trust bracket begins. For 2026, that starting point is $16,000, and unlike the individual thresholds it adjusts each year for inflation.2Internal Revenue Service. Revenue Procedure 2025-32 A trust holding even a modest portfolio can trigger the tax if it retains rather than distributes its income.
What Counts as Net Investment Income
The tax reaches the income categories most people think of as investment returns. Under Section 1411(c), net investment income includes:
- Interest and dividends from bank accounts, bonds, stocks, and mutual funds
- Capital gains from selling stocks, bonds, real estate, and other assets
- Rental and royalty income, unless earned in a business where you actively participate
- Non-qualified annuity payments (annuities held outside employer retirement plans)
- Passive business income from ventures in which you don’t materially participate
- Income from a business that trades in financial instruments or commodities, even if you run it actively
That last category is the one that surprises people. Most operating businesses are outside the NIIT, but trading businesses are pulled in regardless of how many hours the owner puts in.1Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
Rental income deserves a note. It’s generally passive and therefore included, but a taxpayer who qualifies as a real estate professional and materially participates in the rental activity can reclassify the income as non-passive and remove it from the NIIT calculation. Qualifying requires more than half of your personal service hours and more than 750 hours in real property businesses where you materially participate; employee hours don’t count unless you own more than 5% of the employer.3Internal Revenue Service. Publication 925
What’s Excluded
Several kinds of income sit outside the NIIT no matter how high your total income runs.
Wages, salaries, and self-employment earnings are the largest category. Income already subject to self-employment tax under Section 1401(b) is not also hit with the NIIT.1Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax Higher earners pay a separate 0.9% Additional Medicare Tax on the wage side; the two taxes share the MAGI thresholds but target different pools of income.
Distributions from qualified retirement plans — 401(k)s, traditional and Roth IRAs, 403(b)s, 457(b)s — are excluded from net investment income. They still count toward MAGI, though, which is a common trap. A big withdrawal can push you over your threshold and cause the NIIT to apply to your other investment income even when the withdrawal itself is not taxed at 3.8%.4Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
Tax-exempt municipal bond interest is excluded because it’s already outside gross income for regular tax purposes.5Internal Revenue Service. Topic No. 559, Net Investment Income Tax Unemployment compensation, Social Security benefits, and Veterans Administration benefits are also outside the tax.
Gain on the sale of your primary residence is excluded up to the Section 121 limits: $250,000 if single, $500,000 for married couples filing jointly, provided you owned and lived in the home for at least two of the last five years.6Office of the Law Revision Counsel. 26 US Code 121 – Exclusion of Gain From Sale of Principal Residence Any gain above the exclusion is subject to the NIIT.
How the Tax Is Calculated
The 3.8% rate applies to the lesser of your net investment income or the amount your MAGI exceeds your threshold.7Internal Revenue Service. Instructions for Form 8960 That comparison is the whole calculation.
Consider a single filer with $240,000 in MAGI and $60,000 of net investment income. The MAGI excess over the $200,000 threshold is $40,000. Because $40,000 is less than $60,000, the tax applies to $40,000: $40,000 × 3.8% = $1,520.
Reverse the numbers and you get a different result. A single filer with $280,000 in MAGI and $15,000 of net investment income has an $80,000 excess, but only $15,000 of investment income. The tax applies to the smaller figure: $15,000 × 3.8% = $570. You never pay the surtax on more than your actual investment income.
The calculation goes on IRS Form 8960, which totals your investment income by category, subtracts allowable deductions, compares the two numbers, and produces the tax. The result flows to Form 1040 for individuals or Form 1041 for estates and trusts.8Internal Revenue Service. Form 8960 – Net Investment Income Tax – Individuals, Estates, and Trusts
Deductions That Reduce Net Investment Income
You don’t pay 3.8% on gross investment income. Section 1411 lets you subtract deductions “properly allocable” to that income before you apply the rate, and which deductions qualify has changed.
Investment interest expense, meaning interest on money borrowed to buy taxable investments, is fully deductible against net investment income. State, local, and foreign income taxes attributable to investment income are deductible, as are real property taxes on investment properties.9Internal Revenue Service. Instructions for Form 8960 For rental properties, ordinary expenses like depreciation, repairs, and management fees reduce rental income before it enters the NIIT calculation.
Investment advisory fees, custodial fees, and tax preparation costs are no longer deductible. The Tax Cuts and Jobs Act suspended miscellaneous itemized deductions starting in 2018, and the One Big Beautiful Bill Act (P.L. 119-21) made that disallowance permanent. Because these fees aren’t deductible for regular income tax, they can’t be used to reduce net investment income either.9Internal Revenue Service. Instructions for Form 8960
Filing and Estimated Payments
Attach Form 8960 to your return whenever your MAGI exceeds the threshold for your filing status.9Internal Revenue Service. Instructions for Form 8960 The figures come from the same forms you already receive: 1099-INT for interest, 1099-DIV for dividends, 1099-B for sale proceeds, and Schedules K-1 for partnership and S corporation income.
The NIIT is part of your total federal tax liability, so it feeds into quarterly estimated tax and withholding decisions. To avoid an underpayment penalty, you generally need to pay at least 90% of the current year’s total tax or 100% of last year’s total (110% if your prior-year AGI was above $150,000). The IRS matches Form 8960 entries against the 1099s your financial institutions file directly, so reconciling those figures before you submit helps avoid automated notices.
Credits That Cannot Offset the NIIT
Foreign tax credits cannot reduce your NIIT bill. The foreign tax credit under Sections 27(a) and 901(a) applies only to taxes imposed under Chapter 1 of the Internal Revenue Code, while the NIIT sits in Chapter 2A. The general business credit and most other federal credits are blocked for the same reason.4Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
One partial workaround exists. If you elect to deduct foreign income taxes rather than claim them as a credit, some or all of that deduction may reduce your net investment income on Form 8960. Which choice produces the better result depends on the rest of your return.
Ways to Reduce Your Exposure
Because the tax turns on the lesser of two figures, you can lower it by shrinking either your net investment income or your MAGI. A few practical moves:
Contribute more to retirement and health accounts. Traditional 401(k), 403(b), SEP IRA, and HSA contributions reduce MAGI directly, which can drop you below the threshold or trim the excess.
Harvest investment losses. Selling losing positions to offset realized gains reduces net investment income. When you’re above the threshold, each dollar of gain eliminated avoids both regular capital gains tax and the 3.8% surtax.
Spread large gains across years. An installment sale lets you recognize gain over multiple years, keeping each year’s MAGI lower. Section 1031 like-kind exchanges defer gain on investment real estate entirely.
Shift toward tax-exempt investments. Municipal bond interest is excluded from both regular income tax and the NIIT. Once you factor in the 3.8% surtax, muni yields can compete with taxable alternatives for investors consistently above the threshold.
Increase your participation in a business. If you own an interest currently treated as passive, meeting the material participation standard, generally more than 500 hours during the year, reclassifies the income as active and takes it out of the NIIT calculation.