The Net Investment Income Tax applies when two things are true in the same tax year: you have net investment income, and your modified adjusted gross income (MAGI) crosses the threshold for your filing status. The threshold is $200,000 for single filers, $250,000 for married couples filing jointly, and $125,000 for married filing separately. If either condition is missing, you owe no NIIT. If both are met, the 3.8% tax applies to the smaller of your net investment income or the amount by which your MAGI exceeds the threshold.1Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
Those thresholds have never been adjusted for inflation since the tax took effect in 2013. Congress set them in 2010 and left them frozen on purpose, so more households cross into NIIT territory each year as wages and asset values rise.
The MAGI Thresholds
The NIIT applies only to the extent your MAGI exceeds the amount tied to how you file:
- Married filing jointly or qualifying surviving spouse: $250,000
- Single or head of household: $200,000
- Married filing separately: $125,000
For NIIT purposes, MAGI is your adjusted gross income with one adjustment: any foreign earned income excluded under Section 911 gets added back. If you don’t claim the foreign earned income exclusion, your MAGI and your AGI are the same number.1Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
Estates and trusts face a much lower bar. They owe the NIIT on undistributed net investment income above the dollar amount where the top trust income tax bracket begins. For 2026, that bracket starts at just $16,000 of taxable income.2Internal Revenue Service. Rev. Proc. 2025-32 Even modest investment earnings retained inside a trust can trigger the tax, which is why fiduciaries often distribute investment income to beneficiaries who can absorb it against their higher individual thresholds.
What Counts as Net Investment Income
The statute puts net investment income in three categories: interest, dividends, annuities, royalties, and rents that don’t come from a business you actively run; income from passive business activities and from trading financial instruments or commodities; and net gain from selling property that isn’t used in an active trade or business.3Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
In practice, the most common items that count are:
- Interest and dividends from bank accounts, bonds, stocks, and mutual funds
- Capital gains, short-term and long-term, from selling stocks, bonds, investment real estate, or a second home
- Rental income, unless you qualify as a real estate professional who materially participates
- Royalty income from intellectual property, mineral rights, or licensing agreements
- Passive business income from a company where you don’t materially participate
The passive-versus-active line is where most of the complexity sits. If you hold a stake in a business but don’t work in it regularly, the IRS treats your share of the income as passive, and passive income is subject to the NIIT. Material participation is defined by seven specific tests, the most straightforward being that you worked more than 500 hours in the activity during the tax year. Other tests cover situations where your participation was substantially all the participation in the activity, or where you materially participated in five of the last ten years.4Internal Revenue Service. Publication 925 – Passive Activity and At-Risk Rules
Trading in financial instruments or commodities is always treated as investment income, even when it’s your full-time job. The statute targets that category regardless of hours worked.3Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
Income the NIIT Does Not Touch
Plenty of income can push your MAGI above the threshold without itself being subject to the NIIT. Wages, salaries, and bonuses never count as net investment income. Neither do self-employment income, Social Security benefits, unemployment compensation, or alimony.1Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
Qualified retirement plan distributions are also excluded. Withdrawals from 401(k) plans, 403(b) accounts, traditional and Roth IRAs, and 457(b) plans don’t count toward net investment income.3Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax They may still be subject to regular income tax, but the NIIT doesn’t reach them. Tax-exempt interest from municipal bonds is likewise excluded.
Gain from selling your primary residence receives the Section 121 exclusion before the NIIT applies. You can exclude up to $250,000 of gain as a single filer, or $500,000 as a married couple filing jointly, provided you owned and lived in the home for at least two of the five years before the sale.5Office of the Law Revision Counsel. 26 US Code 121 – Exclusion of Gain From Sale of Principal Residence Only gain above those limits feeds into net investment income.
Business income from a company where you materially participate is active income, not investment income. If you own a landscaping business and work there every day, the profits face income tax and self-employment tax, but not the NIIT. Documentation matters. If the IRS challenges your material participation and reclassifies the income as passive, the whole amount becomes subject to the 3.8% tax.
Rental Income and the Real Estate Professional Exception
Rental income is generally passive no matter how many hours you spend on it, which means it feeds the NIIT by default. The exception is the real estate professional status, and qualifying takes two things: more than half of the personal services you perform during the year must be in real estate trades or businesses in which you materially participate, and you must work more than 750 hours in those activities during the year.
Meeting those tests isn’t quite enough on its own. A separate NIIT safe harbor requires participation in each rental activity for more than 500 hours during the year, or in any five of the ten preceding tax years. If you clear that safe harbor, rental income and gains from selling rental property are treated as active and drop out of the NIIT calculation.6eCFR. 26 CFR 1.1411-4 – Definition of Net Investment Income
The grouping election helps here. You can elect to treat all your rental real estate interests as a single activity for the material participation tests. That election is generally irrevocable, but there’s a one-time regrouping opportunity in the first tax year you become subject to the NIIT. If you’re crossing the threshold for the first time, review your activity groupings before filing that return.
How Much You Actually Owe
Once both conditions are met, the tax is 3.8% of the smaller of two figures: your net investment income, or the amount by which your MAGI exceeds your filing status threshold.3Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
A quick example. A single filer has $230,000 in MAGI and $50,000 in net investment income. The excess over the $200,000 threshold is $30,000. Net investment income is $50,000. The NIIT applies to the smaller number: $30,000 × 3.8% = $1,140. The remaining $20,000 of investment income isn’t taxed under the NIIT because it sits within the threshold zone.
The tax is reported on Form 8960, which walks through identifying investment income, subtracting allowable deductions, and computing the tax. The completed form attaches to your Form 1040, or Form 1041 for estates and trusts.7Internal Revenue Service. Instructions for Form 8960 – Net Investment Income Tax
Who the NIIT Never Applies To
Nonresident aliens are not subject to the NIIT. It applies only to U.S. citizens and resident aliens. A nonresident alien married to a U.S. citizen doesn’t become subject to the tax by filing a joint return. The couple is treated as married filing separately for NIIT purposes, and the nonresident spouse remains exempt. Dual-status aliens who are residents for only part of the year owe the NIIT only on income received during their period of U.S. residency.8eCFR. 26 CFR 1.1411-2 – Application to Individuals
The tax also doesn’t apply to entities other than individuals, estates, and trusts. Corporations don’t pay it. And for most households, the practical exemption is simply earning below the threshold: a married couple filing jointly with $240,000 in MAGI owes zero NIIT regardless of how much of that income comes from investments.