Net Investment Income Tax (NIIT) — Who Pays the 3.8% Surcharge?
You sold some investments, calculated your capital gains tax, and thought you were done. Then your tax software added another 3.8% — the Net Investment Income Tax. For a $100,000 gain, that's an extra $3,800 you didn't expect. The NIIT has been in effect since 2013, but its thresholds have never been adjusted for inflation, catching more taxpayers every year.
See if NIIT applies to your investment gains with the Capital Gains Tax Calculator→What Is the NIIT?
The Net Investment Income Tax is a 3.8% surtax on investment income for high earners. It was created by the Affordable Care Act to help fund Medicare.
Unlike most tax thresholds, the NIIT income limits are not indexed to inflation — they haven't changed since 2013 and won't change unless Congress acts.
NIIT Income Thresholds
| Filing Status | MAGI Threshold |
|---|---|
| Single | $200,000 |
| Married Filing Jointly | $250,000 |
| Married Filing Separately | $125,000 |
| Head of Household | $200,000 |
| Qualifying Surviving Spouse | $250,000 |
MAGI = Modified Adjusted Gross Income, which for most people is the same as Adjusted Gross Income (AGI) on line 11 of Form 1040.
What Income Triggers NIIT
Subject to NIIT
| Income Type | Examples |
|---|---|
| Interest | Savings, CDs, bonds (not tax-exempt municipal bonds) |
| Dividends | Qualified and ordinary dividends |
| Capital gains | Stocks, real estate, crypto, collectibles |
| Rental income | Net rental income after expenses |
| Royalties | Intellectual property, mineral rights |
| Passive business income | Businesses you don't actively participate in |
| Annuity income | Taxable portion |
NOT Subject to NIIT
| Income Type | Why Exempt |
|---|---|
| Wages and salary | Covered by the 0.9% Medicare surtax instead |
| Self-employment income | Subject to SE tax, not NIIT |
| Tax-exempt bond interest | Municipal bond interest is excluded |
| Active business income | If you materially participate in the business |
| Distributions from retirement accounts | 401(k), IRA distributions are excluded |
| Social Security benefits | Not investment income |
The distinction between active and passive business income matters. If you're a landlord who actively manages your properties (and meet the real estate professional requirements), your rental income may escape NIIT. If you're a passive investor in a rental partnership, it's subject to NIIT.
How NIIT Is Calculated
The 3.8% applies to the lesser of:
- Your net investment income, OR
- The amount your MAGI exceeds the threshold
Example 1: High MAGI, Moderate Investment Income
| Item | Amount |
|---|---|
| Salary | $220,000 |
| Capital gains | $30,000 |
| Dividend income | $10,000 |
| MAGI | $260,000 |
| Net investment income | $40,000 |
| MAGI over threshold ($250K MFJ) | $10,000 |
| NIIT applies to | $10,000 (lesser amount) |
| NIIT owed | $380 |
Example 2: Moderate MAGI, Large Investment Income
| Item | Amount |
|---|---|
| Salary | $180,000 |
| Capital gains | $120,000 |
| MAGI | $300,000 |
| Net investment income | $120,000 |
| MAGI over threshold ($200K single) | $100,000 |
| NIIT applies to | $100,000 (lesser amount) |
| NIIT owed | $3,800 |
Example 3: Below Threshold
| Item | Amount |
|---|---|
| Salary | $150,000 |
| Capital gains | $40,000 |
| MAGI | $190,000 |
| Threshold (single) | $200,000 |
| NIIT owed | $0 |
Even with $40,000 in investment income, MAGI is below $200,000 — no NIIT.
Strategies to Reduce or Avoid NIIT
1. Maximize Above-the-Line Deductions
Reducing your AGI below the threshold eliminates NIIT entirely. Contribute the maximum to:
- 401(k) ($23,500 in 2026, $31,000 if 50+)
- HSA ($4,300 individual, $8,550 family)
- Traditional IRA (if eligible for deduction)
2. Harvest Capital Losses
Realized losses offset gains, reducing net investment income. Tax-loss harvesting is especially valuable when NIIT is in play — a $10,000 harvested loss saves $1,500 in capital gains tax plus $380 in NIIT.
3. Use Tax-Exempt Investments
Municipal bond interest is excluded from both income tax and NIIT. For high earners in high-tax states, munis can be more valuable after-tax than taxable bonds yielding 1–2% more.
4. Time Income Recognition
If you control when to recognize income (selling stock, converting Roth, exercising options), spreading it across years keeps MAGI closer to the threshold. Bunching all gains into one year can push you well above.
5. Invest Through Retirement Accounts
Gains inside a 401(k) or IRA don't count as net investment income. Distributions from these accounts also don't trigger NIIT. Maximizing tax-advantaged contributions shelters more investment growth from the surcharge.
6. Qualify as a Real Estate Professional
If your rental activity qualifies as active participation under the real estate professional rules, that income escapes NIIT. The bar is high — you need to spend 750+ hours per year and more time in real estate than any other profession.
How to Report NIIT
NIIT is calculated on Form 8960 and reported on Schedule 2 (line 18) of Form 1040. Your tax software handles this automatically, but review the calculation — especially the net investment income figure, which should exclude any active business income.
Estimated tax payments should include NIIT if you expect to owe it. Underpaying can trigger penalties. Check your withholding with the W-4 Withholding Calculator.
NIIT and the Medicare Surtax — What's the Difference?
| Tax | Rate | Applies To | Threshold |
|---|---|---|---|
| NIIT | 3.8% | Investment income | $200K/$250K MAGI |
| Additional Medicare Tax | 0.9% | Wages and self-employment income | $200K/$250K wages |
High earners can owe both — 0.9% on wages above the threshold AND 3.8% on investment income above the threshold. They're separate taxes that fund the same program.
Bottom Line
The 3.8% NIIT applies to the lesser of your net investment income or the amount your MAGI exceeds $200,000 (single) or $250,000 (married). Because the thresholds aren't inflation-adjusted, more taxpayers cross them each year. The most effective strategies are maximizing retirement contributions to reduce MAGI, harvesting losses to reduce net investment income, and timing income recognition across years. Run your full tax picture through the Federal Tax Calculator to see how NIIT affects your total bill.
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