The Net Investment Income Tax is a 3.8% federal surtax on investment earnings for individuals, estates, and trusts whose income exceeds set thresholds. It applies on top of regular income tax and capital gains tax, and it hits the smaller of two figures: your net investment income for the year, or the amount your modified adjusted gross income (MAGI) exceeds your filing threshold.
Who Owes the Tax
For individuals, whether you owe the NIIT turns on your MAGI and filing status:
- $250,000 for married filing jointly or a qualifying surviving spouse
- $200,000 for single or head of household
- $125,000 for married filing separately
These thresholds have been fixed since the tax took effect in 2013 and are not indexed for inflation.1Internal Revenue Service. Questions and Answers on the Net Investment Income Tax Each year, wage growth and asset appreciation pull more households across the line.
Estates and trusts owe the NIIT at a far lower threshold: the dollar amount where the top trust tax bracket begins. For 2026, that figure is $16,000.2Internal Revenue Service. Estimated Income Tax for Estates and Trusts Even modest portfolios held in trust can trigger the tax.
What Counts as Net Investment Income
The tax covers most income you earn from investments rather than from working:
- Interest from bank accounts and bonds
- Dividends from stocks
- Capital gains from selling stocks, real estate, or other assets
- Rental and royalty income
- Non-qualified annuity income
- Passive business income, meaning your share of profits from a business where you don’t materially participate
Income from a business that trades financial instruments or commodities also counts, even if you’re actively involved.3Office of the Law Revision Counsel. 26 US Code 1411 – Imposition of Tax
One item that surprises many investors: capital gain distributions from mutual funds count as net investment income even if you reinvest them automatically. A large year-end distribution can push you across the threshold whether or not the cash ever hits your account.
Income Not Subject to the NIIT
Wages, salaries, and self-employment income from businesses where you actively participate fall outside the tax entirely.4Internal Revenue Service. Topic No. 559, Net Investment Income Tax Several other categories are also excluded:
- Distributions from 401(k)s, 403(b)s, traditional IRAs, Roth IRAs, and 457(b) plans1Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
- Tax-exempt interest from municipal bonds4Internal Revenue Service. Topic No. 559, Net Investment Income Tax
- Social Security benefits
- Unemployment compensation
- Alimony
The retirement plan exclusion has a catch. Distributions escape the 3.8% rate themselves, but they still count toward your MAGI. A large 401(k) withdrawal can push your total income past the threshold and cause your other investment income to fall under the NIIT.
S-corporation profits and other pass-through business income stay out of the calculation when the owner materially participates. Step back from operations and the activity turns passive under the Section 469 rules, and that same income flips into the NIIT base.1Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
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 filing threshold.4Internal Revenue Service. Topic No. 559, Net Investment Income Tax Two examples show how the formula works.
A single filer has $240,000 in MAGI, of which $60,000 is net investment income. The excess over the $200,000 threshold is $40,000. Because $40,000 is smaller than $60,000, the tax applies to $40,000. The bill is 3.8% of $40,000, or $1,520.
Change the numbers. A single filer with $300,000 in MAGI and only $25,000 in net investment income is $100,000 over the threshold, but the investment income is smaller. The tax applies to $25,000, producing a $950 bill.
Deductions That Reduce Net Investment Income
Net investment income is a net figure. You subtract properly allocable deductions from your gross investment income before applying the 3.8% rate.3Office of the Law Revision Counsel. 26 US Code 1411 – Imposition of Tax The most common deduction is investment interest expense. State and local income taxes allocable to investment income and investment advisory fees may also reduce your NII, subject to the allocation rules in the Form 8960 instructions.5Internal Revenue Service. Instructions for Form 8960
Rental property owners can deduct depreciation, operating expenses, and other costs tied to the rental activity. Every dollar of properly allocable expense directly reduces the 3.8% hit.
How to Reduce or Avoid the NIIT
Because the tax depends on both total income and how much of it comes from investments, you have two levers: lower your MAGI below the threshold, or reduce your net investment income.
Harvest Losses to Offset Gains
Selling investments at a loss offsets realized capital gains dollar for dollar. If losses exceed gains, you can apply up to $3,000 of the excess against ordinary income and carry the rest forward. Watch the wash-sale rule: buying the same or a substantially identical investment within 30 days before or after the sale disallows the loss. Switching into a similar but not identical holding is one workaround.
Increase Retirement Contributions
Traditional 401(k), IRA, and similar pre-tax contributions reduce your MAGI. If you’re close to the threshold rather than well above it, contributions alone can bring you under the line and eliminate the tax.
Qualify as a Real Estate Professional
Rental income is normally passive and subject to the NIIT. Real estate professionals whose rental activities they materially participate in are treated as nonpassive. To qualify, you must spend more than 750 hours per year in real property businesses where you materially participate, and that work must represent more than half of your total personal services for the year.6Internal Revenue Service. Publication 925, Passive Activity and At-Risk Rules The hours test is strict, and the IRS scrutinizes these claims. Contemporaneous time logs matter.
Spread Gains Across Years
When you can control the timing of a gain, spreading it across tax years keeps any one year’s MAGI from spiking. Installment sales let you recognize gain as payments come in. Deferring the sale of appreciated stock into a lower-income year can also keep the NIIT off it.
Foreign Investment Income
Investment income earned abroad counts in your NII just like domestic income. Foreign tax credits generally cannot offset the NIIT: the credit rules apply to taxes under Chapter 1 of the Internal Revenue Code, while the NIIT sits in Chapter 2A. Recent court decisions have examined whether tax treaties might allow a credit, but those cases are pending appeal and the IRS currently rejects the position. You may end up paying both the foreign tax and the full 3.8% on the same income with no credit to bridge the gap.
Reporting and Paying the Tax
You report the NIIT on Form 8960, “Net Investment Income Tax—Individuals, Estates, and Trusts,” and attach it to Form 1040 (or Form 1041 for estates and trusts).7Internal Revenue Service. Form 8960 – Net Investment Income Tax—Individuals, Estates, and Trusts The calculated amount transfers to Schedule 2 of Form 1040 and adds to your regular tax.
If you expect to owe the tax, factor it into your estimated payments. The IRS charges underpayment penalties when withholding and quarterly payments fall short.8Office of the Law Revision Counsel. 26 USC 6654 – Failure by Individual to Pay Estimated Income Tax You can generally avoid penalties by paying at least 90% of your current-year tax or 100% of your prior-year tax through withholding and estimated payments. That safe harbor rises to 110% if your prior-year AGI exceeded $150,000 ($75,000 if married filing separately). Use Form 1040-ES to figure quarterly payments that account for the NIIT along with your regular tax and any Additional Medicare Tax.
Unusual investment events are where the NIIT most often surprises people: selling a rental property, exercising stock options, or receiving a large mutual fund capital gain distribution. Run the numbers on Form 8960 before year-end in those situations so you can adjust your final estimated payment rather than face a penalty at filing.