What Is the Net Investment Income Tax?

The net investment income tax is a 3.8% levy on certain investment earnings received by individuals, estates and trusts with income above IRS-set thresholds. It applies to sources such as dividends, capital gains and rental income. Introduced in 2013 through the Health Care and Education Reconciliation Act, the tax kicks depends on the filer’s modified adjusted gross income (MAGI) and the amount of net investment income they receive.

For more help with tax planning, consider working with a financial advisor.

Understanding the Net Investment Income Tax (NIIT)

The net investment income tax (NIIT) is a 3.8% surtax that applies to certain individuals, estates and trusts with income above specific thresholds. It is calculated using the lesser of a taxpayer’s net investment income or the amount by which their modified adjusted gross income (MAGI) exceeds the IRS threshold for their filing status. That amount is then multiplied by 3.8% to determine the NIIT owed.

The tax was enacted as part of the Health Care and Education Reconciliation Act of 2010 and took effect on January 1, 2013. It was introduced to help support healthcare-related funding and has remained in place ever since.

Since its implementation, the tax has affected high-income households with significant investment earnings, including capital gains, dividends, rental income and other passive income sources.

While it functions separately from the regular income tax system, the NIIT can create additional liability for taxpayers who cross certain income thresholds. Because it hinges on both the type and amount of income, its impact can vary widely depending on a taxpayer’s financial profile.

Who’s Subject to the Net Investment Income Tax?

Individuals are frequent net investment income taxpayers, mostly because they represent a large portion of the investment market. Only U.S. citizens and resident aliens with net investment income that exceeds the MAGI thresholds in the table below need to pay the NIIT, though. On the other hand, non-resident aliens are not subject to this tax. The only exception is if they elect to be treated as a resident so they can file jointly with their U.S. citizen or resident spouse.

Net Investment Income Tax (NIIT) Thresholds

Estates and trusts may also need to pay the NIIT. This pertains to estates and trusts that have both undistributed net investment income and adjusted gross income past the dollar amount at which the highest estate/trust tax bracket begins for the current tax year. For 2026, this amount is $16,000, up from $15,650 in 2025.

The IRS stipulates that several types of trusts are not subject to the NIIT, including:

• Trusts that are exempt from income taxes
• Charitable trusts
• Grantor trusts
• Trusts not classified as trusts for federal income tax purposes
• Perpetual care trusts

What Is Net Investment Income?

In order to turn a profit, investors aim to buy investments at a lower price than they’ll eventually sell them for. However, there are many different sources of income, but not all of them produce net investment income.

Net Investment Income (NII) Inclusions and Exclusions ¹

How to Calculate NIIT

Your MAGI determines if you owe the net investment income tax. You can compute your MAGI by taking your adjusted gross income (AGI) and adding any foreign earned income exclusion. You can find your AGI on Form 1040, Line 11. If your MAGI is higher than the statutory threshold for your filing status, then you must pay the net investment income tax.

Next, you’ll need to figure out your net investment income based on the included earnings listed above. But before you can calculate your NII, you must know your gross investment income. Once you have that, subtracting eligible deductions from your gross investment income will provide you your NII. Some common investment deductions are brokerage fees, investment advisory fees, tax preparation charges, local and state income taxes directly linked to investment income, fiduciary expenses, investment interest expenses and any costs involved with rental and royalty income.

Earlier we stated that you pay the NIIT based on the lesser of your net investment income or the amount by which your MAGI surpasses the filing status-based thresholds imposed by the IRS. In simpler terms, the dollar amount that’s subject to this 3.8% tax, will vary as follows:

• If your net investment income is lower than the amount by which you exceeded the statutory threshold, the tax applies to your NII.
• If your net investment income is higher than the amount by which you exceeded the statutory threshold, the tax applies to that exceeding value.

Here are a few examples of NIIT:

Examples of Net Investment Income Tax

How to File the NIIT

Taxpayers subject to the net investment income tax calculate it on Form 8960, Net Investment Income Tax—Individuals, Estates, and Trusts. Individuals generally attach Form 8960 to Form 1040 or 1040-SR, while estates and trusts report the tax with Form 1041. The NIIT is 3.8% of the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds the applicable threshold.

For individuals, the income thresholds are $200,000 for single and head-of-household filers, $250,000 for married couples filing jointly and qualifying surviving spouses, and $125,000 for married taxpayers filing separately. These thresholds are not indexed for inflation. If your modified adjusted gross income exceeds the threshold for your filing status and you have net investment income, Form 8960 is generally used to determine how much NIIT you owe.

Form 8960 generally starts by identifying investment income that may be subject to the tax, such as taxable interest, dividends, annuities, certain rental and royalty income, and net gains from selling investments. Certain investment-related expenses and other adjustments can then reduce the amount of net investment income used in the calculation.

Once the NIIT is calculated, individuals generally carry the amount from Form 8960 to Schedule 2 of Form 1040, where it becomes part of their total tax liability. Because the NIIT can increase the amount owed beyond regular income and capital gains taxes, taxpayers with substantial investment income may need to adjust paycheck withholding or make quarterly estimated tax payments to avoid an underpayment penalty.

For example, suppose a single taxpayer has $230,000 of modified adjusted gross income and $50,000 of net investment income. Their income exceeds the $200,000 threshold by $30,000, so the NIIT would generally apply to $30,000—the lesser of the $50,000 in net investment income or the $30,000 threshold excess. At 3.8%, that would produce an NIIT of $1,140.

Bottom Line

The net investment income tax is an additional 3.8% federal tax that can apply when taxpayers have both sufficient investment income and modified adjusted gross income above the applicable threshold. It can affect income from sources such as interest, dividends, capital gains, annuities, rents and royalties, depending on the circumstances. Calculating the NIIT on Form 8960 can help taxpayers determine whether they owe the tax and how much to include with their federal return.

See how your income fits into current tax brackets with our income tax calculator.

Tips for Managing Your Investments

• A financial advisor can help manage your investment portfolio. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• In order to accurately plan your financial future, you should calculate what kind of returns you’ll need from an investment portfolio to reach your goals. There are a few ways to do this, including SmartAsset’s investment calculator or the rule of 72.

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