What is the Net Investment Income Tax (NIIT)?

The net investment income tax (NIIT) is a 3.8% federal tax on investment income such as interest, dividends, capital gains, and rental income. You owe it only when your modified adjusted gross income (MAGI) is above $200,000 if you’re single or $250,000 if you’re married filing jointly, and only on the smaller of your net investment income or the amount by which your MAGI exceeds that threshold.

NIIT is charged on top of regular income tax and capital gains tax, not instead of them. A long-term gain taxed at the 20% federal rate becomes 23.8% where NIIT applies in full. The tax has been in effect since 2013, and it applies to individuals, estates, and trusts.

NIIT Tax Rate and Thresholds for 2026

The rate is a flat 3.8%. The thresholds depend on your filing status, and they are written into the statute rather than adjusted for inflation, so the 2026 figures are the same ones that applied in 2013.

For NIIT, MAGI is your adjusted gross income (AGI) plus any foreign earned income exclusion you claimed, net of the deductions tied to it. If you didn’t exclude foreign earned income, your MAGI is your AGI. That’s a narrower definition than the ones used for Affordable Care Act (ACA) premium credits or Medicare premiums, which add back items like tax-exempt interest.

What Counts as Net Investment Income

Net investment income is your investment income minus the deductions properly allocable to it, such as investment interest expense and the expenses of a rental property. Capital losses count too, because the tax looks at net gains.

Rental income is net investment income unless it comes from a trade or business you materially participate in, and qualifying as a real estate professional doesn’t settle that on its own.

Retirement Distributions and Roth Conversions

Withdrawals from qualified retirement plans and IRAs are never net investment income, and neither is a Roth IRA conversion. The taxable ones still land in your AGI, though, which means they raise your MAGI. A large traditional IRA withdrawal, a required minimum distribution, or a conversion can lift your MAGI over the threshold and expose investment income that would otherwise have escaped the tax. Qualified Roth withdrawals don’t have this effect, because they aren’t part of AGI.

How Is NIIT Calculated?

NIIT = 3.8% x the lesser of (net investment income) or (MAGI - threshold)

Take a single filer with $180,000 of wages and $50,000 of net investment income from dividends, interest, and long-term gains. The numbers are illustrative.

In the first column, the MAGI excess is the smaller figure, so $20,000 of investment income escapes the tax. In the second, the conversion adds nothing to net investment income, yet it pushes the excess past $50,000 and raises the bill by $760. Beyond that point, more wages or conversions add no further NIIT, because all $50,000 of investment income is already being taxed.

The reverse case matters as well. Someone with $190,000 of MAGI made up entirely of investment income owes no NIIT, because MAGI is under the threshold.

You figure the tax on Form 8960 and file it with Form 1040. To see when a plan crosses the line, you can view NIIT as its own tax category for each year in ProjectionLab’s tax analytics.

How to Reduce or Avoid NIIT

Because the tax is the lesser of two numbers, you can lower it from either side: by shrinking net investment income, or by bringing MAGI closer to the threshold. Which one helps depends on which figure is currently the smaller.

Tax-loss harvesting lowers net gains, and so net investment income. It also lowers the cost basis of what you hold afterward, so part of the saving is a deferral into a later year that may or may not be subject to NIIT.

Municipal bond interest is outside both net investment income and NIIT’s version of MAGI. It is still counted in the MAGI used for Medicare’s income-related monthly adjustment amount (IRMAA) and for ACA premium credits, so the same holding can help with one threshold and hurt with another.

Timing is the other lever. Spreading a large sale across two tax years, or scheduling a Roth conversion for a year with little investment income, can keep the MAGI excess small. Pre-tax 401(k) contributions and deductible Health Savings Account (HSA) contributions lower AGI, which only reduces NIIT when the MAGI excess is the smaller of the two figures. Each of these moves also changes your regular income tax, in that year or a later one, and state taxes follow their own rules, so a lower NIIT bill isn’t the same as a lower total bill.

If you build a tax strategy in ProjectionLab’s optimizer, you can add an Avoid NIIT constraint that limits discretionary income such as Roth conversions on a best-effort basis.

NIIT for Estates and Trusts

Estates and trusts pay 3.8% on the lesser of their undistributed net investment income or the amount by which their AGI exceeds the level where the top trust tax bracket begins. That level is $16,000 for 2026, far below the individual thresholds. Income a trust distributes to beneficiaries is tested on the beneficiaries’ own returns instead. Grantor trusts aren’t taxed separately, since their income is reported by the grantor, and trusts that are exempt from income tax are exempt from NIIT.

Frequently Asked Questions

When does NIIT kick in? In any year your MAGI is above the threshold for your filing status and you have net investment income. There’s no phase-in, and the test resets every year, so a single large gain can trigger NIIT once and never again. Employers don’t withhold for it automatically, and it’s subject to the estimated tax rules, so you may need to raise your withholding or make estimated payments to avoid an underpayment penalty.

When did the NIIT start? January 1, 2013. The thresholds haven’t changed since.

Does NIIT apply to the sale of your home? Only to the gain that exceeds the home sale exclusion, and only if your MAGI is over the threshold. In an IRS example, a married couple with a $600,000 gain excludes $500,000; the remaining $100,000 is net investment income, and it also raises their MAGI.

Is NIIT the same as the Additional Medicare Tax? No. The Additional Medicare Tax is 0.9% on wages and self-employment income, and NIIT is 3.8% on investment income. The dollar thresholds match for single, head of household, and married filers, but not for a qualifying surviving spouse, whose threshold is $250,000 for NIIT and $200,000 for the Additional Medicare Tax. The two taxes also measure their thresholds against different income, and you can owe both in one year. They’re reported on separate forms: Form 8959 for the Additional Medicare Tax and Form 8960 for NIIT.

Do nonresident aliens pay NIIT? No. NIIT doesn’t apply to nonresident aliens. A dual-status taxpayer owes it only for the part of the year they’re a U.S. resident, and the threshold isn’t prorated for that shorter period.