What Is Form 8960: Net Investment Income Tax Filers and Deductions

Form 8960 is the IRS form individuals, estates, and trusts use to calculate the Net Investment Income Tax, a 3.8 percent tax on certain investment earnings that kicks in once your income crosses a set threshold.¹ For 2026, the 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.² Those numbers are fixed by statute and are not adjusted for inflation, so more taxpayers cross them each year.

The tax sits on top of your regular income tax and is calculated separately from your ordinary tax brackets. It targets earnings from money and property, not wages you earn through work.

Who Owes the Tax

You owe the NIIT if your modified adjusted gross income (MAGI) exceeds the threshold for your filing status:

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

For most people, MAGI equals the adjusted gross income shown on Line 11 of Form 1040. The one common adjustment is for taxpayers who exclude foreign earned income under Section 911: if you claim that exclusion, add the excluded amount back to reach your MAGI.³

Crossing the threshold does not automatically mean the tax applies to all of your investment income. The 3.8 percent rate is applied to the smaller of two numbers: your net investment income, or the amount by which your MAGI exceeds the threshold. If your investment income is large but you are only a little over the threshold, the excess-MAGI figure limits the tax.

Estates and Trusts

Estates and trusts are subject to the NIIT at a much lower threshold. Instead of a set dollar amount, the threshold is the income level where the top bracket for estates and trusts begins, which for 2026 is $16,000.⁴ The tax applies only to undistributed net investment income. A fiduciary who distributes investment income to beneficiaries before year-end can reduce or eliminate the entity’s NIIT, though the beneficiaries may then owe the tax on their own returns.

Nonresident Aliens

Nonresident aliens are not subject to the NIIT.⁵ Special rules apply when a nonresident alien is married to a U.S. citizen and they elect to file jointly. A dual-status individual, who is a U.S. resident for only part of the year, owes the tax only for the resident portion of the year, and the threshold is not prorated.

What Counts as Net Investment Income

The tax reaches earnings from capital rather than labor. The main categories are:

Interest and dividends, including bank interest, bond interest, and stock dividends
Capital gains from selling stocks, bonds, mutual funds, real estate, or other investment property, to the extent included in taxable income
Rental and royalty income
Distributions from non-qualified annuities
Your share of income from a trade or business in which you do not materially participate
Earnings from a business that trades in financial instruments or commodities

Material participation generally means being involved in the business on a regular, continuous, and substantial basis.⁶

Gain from selling an interest in a partnership or S corporation is generally included in net investment income.⁷ If you materially participated in the entity, Section 1411(c)(4) lets you exclude the portion of the gain attributable to assets used in the active business; only the part tied to passive or investment assets stays in the calculation.²

Income That Stays Off Form 8960

Several familiar sources of income are not net investment income and do not appear on the form:

Wages, salaries, and self-employment earnings from active work
Social Security benefits and unemployment compensation
Tax-exempt interest, including municipal bond interest
Distributions from qualified retirement plans such as 401(k)s and IRAs
Operating income from a business in which you materially participate

The NIIT is a separate tax from the 0.9 percent Additional Medicare Tax on wages and self-employment income. A high earner with both large wages and significant investment income can owe both.⁸

Selling a Home

Gain excluded from income under the primary-residence rules is also excluded from the NIIT. Section 121 lets single filers exclude up to $250,000 of gain and joint filers up to $500,000, if the ownership and use tests are met.⁹ Only gain above those limits counts as net investment income.

Rental Income and the Real Estate Professional Exception

Rental income is ordinarily passive and subject to the NIIT. If you qualify as a real estate professional and materially participate in the rental activity, the income is reclassified as nonpassive and drops out of net investment income.¹⁰ Qualifying requires spending more than half your working hours and at least 750 hours per year in real property trades or businesses, plus materially participating in each rental (or making a valid election to group them).

Deductions You Can Subtract

Net investment income is not the same as gross investment income. Part II of Form 8960 is where you subtract expenses tied to producing that income.

Investment interest expense, meaning interest on loans used to buy investments and reported through Form 4952, is deductible on Line 9a and is not affected by the suspension of miscellaneous itemized deductions.¹¹³

You can also deduct the share of your state, local, and foreign income taxes that relates to your investment income. Because those taxes cover all of your income, you allocate a reasonable portion. One accepted method is to divide gross investment income by AGI and apply that percentage to your total state and local income taxes.³ If investment income is 30 percent of your AGI and you paid $12,000 in state income tax, $3,600 goes on Line 9b.

Investment advisory fees, custodial fees, and similar management expenses are no longer deductible. They fall under the miscellaneous itemized deductions suspended by the Tax Cuts and Jobs Act starting in 2018 and made permanently non-deductible by the One Big Beautiful Bill Act, so they cannot reduce your net investment income either.³

How Form 8960 Is Structured

Form 8960 has three parts. Before starting, pull together the income documents you already use for your return: Form 1099-INT for interest, Form 1099-DIV for dividends, Form 1099-B for brokerage sales, and any Schedule K-1s from partnerships or S corporations.³

Part I reports gross investment income: interest, dividends, annuities, rental and royalty income, capital gains, and passive business income.
Part II reports the deductions above. Investment interest expense goes on Line 9a, allocated state and local taxes on Line 9b, and other properly allocable deductions on Line 10. Line 9c for miscellaneous investment expenses is entered as zero.
Part III compares your net investment income to the amount by which your MAGI exceeds your threshold, and applies the 3.8 percent rate to the smaller of the two.

A worked example: you file single with $240,000 in MAGI and $60,000 in net investment income. Your MAGI exceeds the $200,000 threshold by $40,000. The tax applies to the lesser of $60,000 or $40,000, so you owe 3.8 percent of $40,000, which is $1,520.²

Estates and trusts follow the same logic on separate lines in Part III, comparing undistributed net investment income to the excess of AGI over the $16,000 threshold for 2026.⁴

Paying the Tax and Avoiding Penalties

Nothing withholds the NIIT from your investment income the way payroll withholds tax from wages. If you expect to owe it, you either need to make quarterly estimated tax payments or increase your wage withholding to cover the amount. Skipping this step can trigger an underpayment penalty.⁸

The NIIT is included on Line 2 of Form 2210, the form for calculating underpayment of estimated tax.¹² To avoid the penalty, you generally have to pay at least 90 percent of the current year’s total tax (including the NIIT) or 110 percent of the prior year’s tax if your AGI exceeded $150,000, or $75,000 if married filing separately.¹³ Form 1040-ES is used to submit estimated payments.

You attach Form 8960 to your annual return. Individuals attach it to Form 1040 and carry the tax to Schedule 2, Line 12; fiduciaries attach it to Form 1041 and report the amount on Schedule G, Line 5.³ The tax is due on the return’s original due date. An extension to file is not an extension to pay.

If you owe the tax and pay late, the IRS charges a failure-to-pay penalty of 0.5 percent of the unpaid amount for each month or partial month it stays outstanding, up to 25 percent, and interest runs from the original due date.¹⁴ Those charges can stack on top of any underpayment penalty for insufficient estimated payments during the year.

1
Internal Revenue Service. About Form 8960, Net Investment Income Tax Individuals, Estates, and Trusts
2
Office of the Law Revision Counsel. 26 U.S.C. 1411 – Imposition of Tax
3
Internal Revenue Service. Instructions for Form 8960
4
Internal Revenue Service. Revenue Procedure 2025-32
5
Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
6
Office of the Law Revision Counsel. 26 U.S.C. 469 – Passive Activity Losses and Credits Limited
7
eCFR. 26 CFR 1.1411-4 – Definition of Net Investment Income
8
Internal Revenue Service. Topic No. 559, Net Investment Income Tax
9
Office of the Law Revision Counsel. 26 U.S.C. 121 – Exclusion of Gain From Sale of Principal Residence
10
Internal Revenue Service. Publication 925, Passive Activity and At-Risk Rules
11
Internal Revenue Service. About Form 4952, Investment Interest Expense Deduction
12
Internal Revenue Service. Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts
13
Internal Revenue Service. Estimated Tax
14
Internal Revenue Service. Failure to Pay Penalty