Guides
Net Investment Income Tax (NIIT): The 3.8% Surtax, Explained
The net investment income tax is a 3.8% surtax on investment earnings that applies once your modified adjusted gross income (MAGI) crosses a fixed threshold: $200,000 for single filers and $250,000 for married couples filing jointly. You pay 3.8% on the smaller of two numbers, your net investment income or the amount your MAGI exceeds the threshold. It was enacted under Section 1411 of the Internal Revenue Code and took effect January 1, 2013. You report and calculate it on IRS Form 8960.
The thresholds have never changed. They are not indexed for inflation, so more households cross them each year as incomes rise. If your MAGI sits below your threshold, you owe zero NIIT no matter how large your investment income is.
Who pays the net investment income tax
The NIIT applies to individuals, estates, and trusts that have both net investment income and MAGI above a set threshold. If either condition fails, the tax is zero. Wage earners with no investment income never owe it, and high investors with MAGI under the threshold never owe it. Both triggers must be present in the same year.
For individuals, the tax lands on the lesser of net investment income or the MAGI excess. Estates and trusts face a much lower threshold, tied to the top trust income tax bracket, which was $15,650 for 2025.
Nonresident aliens are generally not subject to the NIIT. U.S. citizens and residents living abroad remain subject to it, and the foreign earned income exclusion under Section 911 is added back into MAGI for this calculation.
MAGI thresholds: fixed, not inflation-indexed
The NIIT thresholds are set in statute and do not adjust for inflation, unlike tax brackets or the standard deduction. The same dollar figures that applied in 2013 apply for 2025 returns filed in 2026. Congress would have to amend Section 1411 to change them.
| Filing status | MAGI threshold |
|---|---|
| Single | $200,000 |
| Head of household | $200,000 |
| Married filing jointly | $250,000 |
| Qualifying surviving spouse | $250,000 |
| Married filing separately | $125,000 |
| Estates and trusts (2025) | $15,650 |
Because these numbers are frozen, the NIIT reaches more taxpayers over time, an effect often called bracket creep. A household earning $180,000 in 2013 may earn well past $250,000 today after roughly a decade of raises, while the threshold has not moved a dollar.
MAGI for NIIT purposes starts with your adjusted gross income (Form 1040) and adds back the foreign earned income exclusion under Section 911, net of any deductions or exclusions disallowed with it. For most domestic taxpayers, MAGI equals AGI. See our guide to adjusted gross income for how AGI itself is built.
What counts as net investment income
Net investment income is generally the income your capital produces, reduced by allocable expenses. The tax targets passive and portfolio earnings, not the money you make from working or from actively running a business. The category has clear inclusions and equally clear carve-outs.
Included in net investment income:
- Interest (taxable), dividends, and capital gain distributions
- Net capital gains from selling stocks, bonds, mutual funds, and investment real estate, to the extent counted in taxable income
- Rental and royalty income, unless earned in a non-passive trade or business
- Non-qualified annuity income
- Income from a passive trade or business, or from trading financial instruments or commodities
- Net gain on the sale of a partnership or S corporation interest, generally to the extent the owner was passive
Excluded from net investment income:
- Wages and self-employment income
- Distributions from qualified retirement plans (401(k), 403(b), IRAs, and similar)
- Social Security benefits and most tax-exempt municipal bond interest
- Operating income from an active, non-passive business
- Unemployment compensation, alimony, and gain excluded on the sale of a primary residence
The excluded categories are large. Retirement distributions and active business income stay out even though they can raise your MAGI, which can push the MAGI-over-threshold figure up and increase NIIT on your investment income.
Net, not gross
The word “net” matters. You may subtract expenses properly allocable to the income, such as investment interest expense, investment advisory fees, and state income tax attributable to investment income. Losses can offset gains: a $10,000 capital loss reduces net investment income against other gains. The cost basis of what you sell also drives the taxable gain, so accurate records lower the number the 3.8% applies to. See cost basis explained for how basis is tracked and adjusted.
Form 8960: how the tax is calculated
Form 8960 is a single page that reconciles your investment income, subtracts allocable deductions to reach net investment income, then compares that figure to your MAGI excess and multiplies the smaller number by 3.8%. It attaches to Form 1040 for individuals and Form 1041 for estates and trusts.
The form works in three parts:
- Investment income (lines 1 to 8). Report interest, dividends, annuities, rents, royalties, passive business income, and net gain from dispositions.
- Investment expenses (lines 9 to 10). Subtract allocable deductions such as investment interest expense and state and local income taxes tied to that income.
- Tax computation (lines 12 to 17). Take net investment income, compute MAGI minus your threshold, and apply 3.8% to the lesser of the two.
The capital gain and loss figures flowing into Form 8960 come from Form 8949 and Schedule D, so those must be complete first. The NIIT is not withheld from paychecks, so it can create a balance due at filing. Taxpayers who expect it often cover it through estimated tax payments to avoid an underpayment penalty.
Worked example
Consider a married couple filing jointly with $300,000 of MAGI. That total includes $220,000 of wages and $80,000 of net investment income (dividends, interest, and a stock sale gain). Their filing-status threshold is $250,000.
| Step | Amount |
|---|---|
| Net investment income | $80,000 |
| MAGI | $300,000 |
| MAGI threshold (MFJ) | $250,000 |
| MAGI over threshold | $50,000 |
| Lesser of the two | $50,000 |
| NIIT (3.8% x $50,000) | $1,900 |
The couple owes $1,900, not 3.8% of the full $80,000. Because their MAGI excess ($50,000) is smaller than their investment income ($80,000), the excess caps the tax. If their MAGI were instead $400,000, the excess would be $150,000, larger than the $80,000 of investment income, so the tax would apply to the full $80,000: 3.8% x $80,000 = $3,040.
This lesser-of rule is the key mechanic. Reducing either number reduces the tax, which is why timing gains, harvesting losses, and managing MAGI can matter near the threshold.
Frequently asked questions
Is the net investment income tax the same as the additional Medicare tax?
No. They are two separate 0.9% and 3.8% surtaxes enacted together under the Affordable Care Act. The Additional Medicare Tax is 0.9% on wages and self-employment income above the threshold. The NIIT is 3.8% on investment income. A high earner with both wages and investment income can owe both in the same year, each computed on its own form.
Does selling my home trigger the NIIT?
Usually not. Gain on a primary residence that qualifies for the Section 121 exclusion, up to $250,000 single or $500,000 married filing jointly, is excluded from net investment income. Only gain above that exclusion, or gain on a second home or investment property, counts. Selling a rental or vacation property can generate NIIT on the taxable gain.
Are retirement account withdrawals subject to the NIIT?
No. Distributions from qualified plans such as 401(k)s, 403(b)s, traditional IRAs, and Roth IRAs are excluded from net investment income. They can still raise your MAGI, though, which may increase the MAGI-over-threshold figure and expose more of your other investment income to the 3.8% tax.
How can I reduce or avoid the net investment income tax?
Strategies may include harvesting capital losses to offset gains, holding tax-exempt municipal bonds, maximizing retirement contributions to lower MAGI, spreading large gains across tax years, and converting passive activity to material participation where facts support it. The right move depends on your entity structure, state, and circumstances, so confirm with a tax professional before acting.
Do estates and trusts pay a higher NIIT?
The rate is the same 3.8%, but the threshold is far lower. For 2025 the trust and estate threshold was $15,650, tied to the top trust bracket, versus $200,000 or $250,000 for individuals. This compressed threshold is a common reason advisors distribute trust income to beneficiaries, who may sit below their own individual thresholds.
Do I still owe NIIT if my investment income is negative?
No. If allocable losses and expenses reduce net investment income to zero or below, there is no NIIT for the year, regardless of MAGI. The tax applies only to positive net investment income, and only when MAGI also exceeds the threshold. A net capital loss year can eliminate the tax entirely.
Reviewed by The Ledgerism Editorial Team. Last reviewed: July 2026.