Net Investment Income Tax: Who Pays the Extra 3.8%?

The net investment income tax (NIIT) is an extra 3.8% federal tax on investment income for higher earners. It's charged on top of regular income tax and capital gains tax, and it's reported on IRS Form 8960.

Checked October 12, 2026 against IRS guidance. This is general information, not tax advice.

2026 income thresholds

You can owe NIIT only if your modified adjusted gross income (MAGI) is above these amounts. For most people, MAGI is the same as adjusted gross income.

These thresholds have stayed the same since the tax began in 2013 and are not adjusted for inflation, so more people owe it each year.

What counts as investment income

• Included: interest, dividends, capital gains (including from selling stocks, funds and crypto), rental and royalty income, and income from businesses you don't actively work in.
• Not included: wages and self-employment income, withdrawals from 401(k)s and IRAs, tax-exempt municipal bond interest, and the part of a home-sale gain covered by the $250,000/$500,000 exclusion.

Retirement account withdrawals aren't taxed by NIIT themselves, but they do raise your MAGI, which can push other investment income over the line.

How it's calculated

The 3.8% applies to whichever is smaller: your net investment income, or the amount your MAGI is over the threshold.

Example: a single filer has $230,000 of MAGI, including $40,000 of dividends and gains. MAGI is $30,000 over the $200,000 threshold. The smaller figure is $30,000, so the NIIT is 3.8% × $30,000 = $1,140.

Where the tax came from

Congress created the NIIT in the Health Care and Education Reconciliation Act of 2010, and it took effect on January 1, 2013. It's often called a Medicare surtax because it was passed with the health care law, though the money goes to the government's general fund. Because the $200,000 and $250,000 thresholds have never been raised, inflation has cut their real value by about 30% since 2013, and far more households pay it now than when it started.

What counts toward MAGI

For most people, modified adjusted gross income is the adjusted gross income on line 11 of Form 1040. People who exclude foreign earned income add that back.

Itemized deductions, like mortgage interest or charitable gifts, don't lower MAGI, because they come after AGI.

Ways to stay under the threshold

• Max out pre-tax workplace retirement contributions. Every dollar into a traditional 401(k) lowers MAGI.
• Give appreciated shares to charity instead of selling them and donating cash. You don't recognize the gain at all.
• Time large sales. If you're near the line, a stock or property sale in a lower-income year (such as after retirement but before required withdrawals) can avoid NIIT entirely.
• Spread a big gain. An installment sale of property or a business can spread the gain over several years.
• Plan Roth conversions in years when your income is lower, so the conversion doesn't push investment income over the line.

Business owners

Income from a business you actively work in, such as an S corporation or partnership where you materially participate, isn't net investment income. Income from a business you only invest in is. If you sell your share of an active business, part of the gain may be excluded; that calculation is complex, so use a tax professional.

Form 8960, in brief

If your MAGI is under the threshold, you don't need to file it.

The married-filing-separately trap

Each spouse filing separately gets a threshold of only $125,000, half the joint amount. A couple with one high earner and substantial investment income can owe more NIIT filing separately than jointly, so compare both ways before choosing.

Legal ways to owe less

• Use retirement accounts. Growth inside a 401(k), IRA or Roth IRA isn't net investment income.
• Harvest losses. Selling losing investments offsets gains. See brokerages that automate tax-loss harvesting.
• Spread out big gains. Selling over two tax years can keep each year's MAGI lower.
• Consider municipal bonds in a taxable account, since their interest is exempt.
• Hold for more than a year to get lower long-term capital gains rates. NIIT still applies, but the total bill is lower. See the one-year rule.

Most tax software calculates Form 8960 for you once your 1099s are entered. Compare options in best tax software for investors.

More examples

Selling your home

A married couple sells their home for a $650,000 gain. The first $500,000 is excluded, so $150,000 is a taxable gain and counts as investment income. If their other income is $180,000, their MAGI is $330,000, which is $80,000 over the threshold. The NIIT is 3.8% of the smaller amount ($80,000), or $3,040, on top of capital gains tax.

Rental income

Rental profit counts unless you qualify as a real estate professional who materially participates in the rentals. For most people with one or two rentals, the net rental income after expenses and depreciation is included.

What reduces your net investment income

"Net" means some costs come off before the 3.8% applies, including investment interest expense (such as margin interest), state and local income tax on investment income, and expenses of rental property. Your tax software or preparer works these out on Form 8960.

Your total rate on gains

Short-term gains (held a year or less) are taxed at ordinary income rates, plus the 3.8% if it applies.

Paying it during the year

The NIIT isn't withheld automatically. If you expect to owe it, increase your paycheck withholding or include it in quarterly estimated tax payments to avoid an underpayment penalty.

FAQ

Is the NIIT the same as capital gains tax? No. It's an extra 3.8% added on top of capital gains tax for people over the income thresholds.

Do I owe NIIT on my 401(k) withdrawals? No, but the withdrawal counts toward your MAGI, which can make your other investment income subject to the tax.

Do I owe NIIT on selling my home? Only on the gain above the $250,000 exclusion ($500,000 for married couples filing jointly), and only if your MAGI is over the threshold.

Will the thresholds go up with inflation? No. They're set in law at $200,000 and $250,000 and have not changed since 2013.

Does a Roth conversion trigger NIIT? The conversion itself isn't investment income, but it raises your MAGI for that year, which can make your other investment income subject to the tax.

Is Social Security income subject to NIIT? No, but the taxable part of your benefits counts toward MAGI.

Does NIIT apply to crypto? Yes. Gains from selling crypto are investment income.

Do trusts pay NIIT? Yes, at a much lower threshold: about $16,000 of undistributed income for 2026, the level where the top trust tax bracket starts.

Do I owe NIIT on dividends inside my IRA or 401(k)? No. Income inside a retirement account isn't net investment income.

Does interest from a savings account count? Yes. Bank and CD interest is investment income. Municipal bond interest that's tax-exempt isn't.

Is annuity income subject to NIIT? Payments from a non-qualified annuity (bought outside a retirement plan) can be. Annuities inside an IRA or 401(k) aren't.

Can I deduct the NIIT? No. It's not deductible on your federal return.