The 3.8% Net Investment Income Tax: Who Pays It
The Net Investment Income Tax (NIIT) is a 3.8% surtax on the lesser of your net investment income or the amount by which your MAGI exceeds the threshold. The thresholds are $200,000 for single filers, $250,000 for married filing jointly, and $125,000 for married filing separately. These are statutory and not indexed for inflation. Note (TODO_VERIFY): NIIT figures are sourced from IRS guidance and flagged for human verification in the data file. Confirm against the current IRS guidance before relying on these figures for filing purposes.
What net investment income includes
Net investment income (NII) is defined under IRC section 1411. It includes:
- Capital gains: Both long-term and short-term gains from the sale of stocks, bonds, mutual funds, real estate (above any applicable exclusion), and other capital assets.
- Dividends: Qualified and non-qualified dividends from stocks and mutual funds held in taxable accounts.
- Interest income: Interest from bank accounts, CDs, bonds, and other taxable interest sources.
- Rental income: Net rental income from real estate, unless you are a real estate professional for tax purposes (as defined in IRC section 469).
- Royalties: Royalties from intellectual property, oil and gas interests, and similar passive income.
- Passive activity income: Income from business activities in which you do not materially participate.
What net investment income excludes
Several income types are specifically excluded from NII:
- Wages and salaries: Earned income from employment is not NII.
- Net self-employment income: Income from a business in which you materially participate is not NII (though it may be subject to self-employment tax).
- Social Security benefits: Social Security is not NII, even if it is partially taxable for federal income tax purposes.
- Tax-exempt interest: Interest from municipal bonds that is excluded from gross income is also excluded from NII.
- Distributions from qualified retirement plans: Withdrawals from IRAs, 401(k)s, 403(b)s, pensions, and similar plans are not NII. However, these distributions increase MAGI and may cause other NII to become subject to the surtax.
- Unemployment compensation and alimony: Not included in NII.
How the NIIT is calculated
The NIIT is 3.8% of the lesser of:
- Your net investment income for the year, or
- The amount by which your modified adjusted gross income (MAGI) exceeds the threshold for your filing status.
This lesser-of rule means high-income taxpayers with little NII will owe NIIT only on their actual NII, while high-NII taxpayers who are just above the threshold will owe NIIT only on the amount above the threshold.
Worked examples
Example 1: Single filer, modest NII
- MAGI: $250,000
- Net investment income (NII): $30,000
- MAGI excess over single threshold ($200,000): $250,000 minus $200,000 = $50,000
- Lesser of NII ($30,000) or MAGI excess ($50,000): $30,000
- NIIT: 3.8% x $30,000 = $1,140
Example 2: Single filer, large NII
- MAGI: $350,000
- NII: $200,000
- MAGI excess over single threshold: $350,000 minus $200,000 = $150,000
- Lesser of NII ($200,000) or MAGI excess ($150,000): $150,000
- NIIT: 3.8% x $150,000 = $5,700
Example 3: MFJ filer
- MAGI: $280,000
- NII: $40,000
- MAGI excess over MFJ threshold ($250,000): $280,000 minus $250,000 = $30,000
- Lesser of NII ($40,000) or MAGI excess ($30,000): $30,000
- NIIT: 3.8% x $30,000 = $1,140
Interaction with capital gains tax
The NIIT is a surtax that stacks on top of the regular federal capital gains tax. It does not replace it. A high-income taxpayer who realizes long-term capital gains above the 20% bracket threshold and above the NIIT threshold faces both taxes:
- Federal long-term capital gains rate: 20%
- NIIT surtax: 3.8%
- Combined effective rate: 23.8%
For reference, the federal 20% long-term capital gains rate applies to taxable income above $545,500 (single) or $613,700 (MFJ) in 2026 (Rev. Proc. 2025-32, section 4.03).
Short-term capital gains are subject to ordinary income tax rates. The NIIT can also apply to short-term gains if they are included in NII and your MAGI exceeds the threshold.
Form 8960 and reporting
You report and calculate the NIIT on IRS Form 8960, Net Investment Income Tax. The form walks through:
- Total investment income (Part I)
- Deductions allocable to investment income (Part II)
- Net investment income and the NIIT calculation (Part III)
The NIIT calculated on Form 8960 flows to Schedule 2 (Additional Taxes) of Form 1040 and is included in your total tax liability. It is not a separate estimated tax payment; it is part of your annual return.
If you expect to owe the NIIT, factor it into your quarterly estimated tax payments to avoid an underpayment penalty. See the quarterly estimated tax guide for payment deadlines.