Calculate your 2026 Net Investment Income Tax with our free NIIT calculator. Learn the 3.8% surtax thresholds, what income counts, Form 8960 filing, and proven strategies to reduce or avoid NIIT liability.
Net Investment Income Tax — $200K/$250K MAGI thresholds
Your total MAGI including all income sources
Capital gains, dividends, interest, rental income, royalties
NIIT threshold: $200,000 for Single
The 3.8% surtax that catches many high earners off guard — here is what it is and why it matters for your wallet.
3.8%
Flat surtax on net investment income
$200K+
MAGI threshold for single filers
23.8%
Effective top rate on long-term gains
The Net Investment Income Tax was born out of the Affordable Care Act, signed into law in 2010, and it officially took effect on January 1, 2013. Congress created it to help fund the expansion of health insurance coverage by requiring higher-income taxpayers to chip in an additional percentage on their investment earnings. Unlike ordinary income tax brackets that shift every year with inflation, the NIIT thresholds have remained at $200,000 and $250,000 since day one. That means more and more taxpayers get pulled into the NIIT net each year as their incomes creep up while the thresholds stay put. For 2026, the 3.8% rate is unchanged, but the real-world impact keeps growing.
Here is the simple version: if your modified adjusted gross income exceeds the threshold for your filing status, and you have investment income, you probably owe the NIIT. The tax equals 3.8% of whichever is smaller — your net investment income or the amount your MAGI exceeds the threshold. That two-part formula means the NIIT can never exceed 3.8% of your total investment income, and it only bites on the dollars above the threshold. Think of it as a toll booth on the highway of investment earnings — you only pay when your income vehicle is big enough to trigger it.
The IRS casts a wide net when defining net investment income. It includes capital gains from selling stocks, bonds, mutual funds, real estate, and other capital assets — both short-term and long-term gains count. Dividends from stocks and mutual funds, whether qualified or non-qualified, are included. Taxable interest from savings accounts, certificates of deposit, and corporate bonds is subject to NIIT. Net rental income from real estate properties you own, royalty income from intellectual property, income from passive business activities where you do not materially participate, and certain annuity distributions all fall under the NIIT umbrella as well.
One thing people often miss: you get to subtract investment-related deductions from your gross investment income before applying the NIIT. Investment interest expense, advisory fees, and other costs directly connected to generating investment income can all reduce your net figure. That subtraction can make a meaningful difference, especially for taxpayers with large portfolios that carry management fees.
Not all income is on the NIIT menu. Wages, salaries, and tips are completely excluded. Self-employment income from a business where you actively work does not count. Social Security benefits are left alone. Tax-exempt interest from municipal bonds is not investment income for NIIT purposes — a big reason why munis are so popular with high earners. Distributions from qualified retirement plans like 401(k)s and traditional IRAs, while they do push up your MAGI, are not classified as investment income. Active business income where you materially participate, veterans benefits, and gains from selling your primary home up to the exclusion limits are also shielded. Understanding this line between taxable and exempt income is where real tax savings happen.
The NIIT only triggers when your modified adjusted gross income crosses these thresholds. The rate is a flat 3.8% on the applicable base.
| Filing Status | MAGI Threshold | Who This Affects |
|---|---|---|
| Single | $200,000 | Unmarried individuals |
| Married Filing Jointly | $250,000 | Couples filing together |
| Married Filing Separately | $125,000 | Couples filing apart |
| Head of Household | $200,000 | Qualifying unmarried with dependents |
Follow these four steps to figure out exactly what you owe. Or skip the math and use our calculator above.
For most taxpayers, MAGI for NIIT purposes is simply the adjusted gross income shown on your tax return — no complicated adjustments needed. It includes every source of taxable income: wages, investment gains, business income, retirement distributions, and anything else the IRS counts. Pull your AGI from last year's return as a starting point, then adjust for any changes you expect in 2026. Compare your total MAGI against the threshold for your filing status. If it comes in below the line, you are done — no NIIT owed. If it crosses the threshold, move to step two.
Add up every source of investment income: capital gains from trades and sales, dividends, taxable interest, net rental income, royalties, passive business income, and applicable annuities. Then subtract any deductions directly tied to that investment income — things like investment interest expense, advisory fees, and state taxes allocable to investment income. What remains is your net investment income. If your NII is zero or negative, the NIIT cannot apply even if your MAGI is well above the threshold, because the tax is calculated on the lesser of NII or excess MAGI.
This is the crucial comparison that determines your NIIT base. Take your MAGI, subtract the threshold for your filing status, and you get the excess MAGI. Then compare that number to your net investment income. Whichever is smaller becomes the amount that the 3.8% tax applies to. For example, a single filer with $300,000 in MAGI and $80,000 in NII would compare $80,000 (NII) against $100,000 (excess MAGI). Since $80,000 is the smaller figure, that becomes the NIIT base. This two-part formula ensures the tax never exceeds 3.8% of your actual investment earnings.
Take the NIIT base from step three and multiply it by 0.038. That is your Net Investment Income Tax liability for the year. Using our earlier example, $80,000 times 0.038 equals $3,040. This amount gets reported on Form 8960 and is added to your total tax bill on Form 1040. It is not deductible, which means it represents a true additional cost on top of your regular income tax and any capital gains tax you already owe. Every dollar of NIIT is a dollar you cannot recover through deductions elsewhere on your return.
A married couple filing jointly has $340,000 in MAGI and $75,000 in net investment income for 2026. Here is how their NIIT breaks down:
1. MAGI: $340,000
2. Threshold (MFJ): $250,000
3. Excess MAGI: $340,000 - $250,000 = $90,000
4. Net Investment Income: $75,000
5. NIIT Base (lesser of excess or NII): $75,000
6. NIIT: $75,000 x 3.8% = $2,850
Notice that the NIIT applies to $75,000 (the smaller number), not the full $90,000 excess MAGI. That is the protective feature of the dual-limit formula.
When you stack the NIIT on top of capital gains tax and ordinary income rates, the true marginal rate on your earnings can be eye-popping.
| Income Type | Base Rate | + NIIT | Combined Rate |
|---|---|---|---|
| Long-term capital gains (top bracket) | 20% | +3.8% | 23.8% |
| Short-term capital gains (top bracket) | 37% | +3.8% | 40.8% |
| Qualified dividends (top bracket) | 20% | +3.8% | 23.8% |
| Non-qualified dividends (top bracket) | 37% | +3.8% | 40.8% |
| Rental income (top bracket) | 37% | +3.8% | 40.8% |
| Net investment income + CA state tax | 20%+13.3% | +3.8% | 37.1%+ |
Those combined rates are not just theoretical numbers on a chart. A California resident in the top bracket selling a stock could hand over more than 37 cents of every long-term gain dollar to federal and state taxes combined. Short-term gains get even worse, approaching or exceeding 50% in high-tax states. And because the NIIT thresholds are not inflation-adjusted the way regular tax brackets are, more taxpayers get swept into the surtax each year. The compounding effect means that what feels like a small 3.8% add-on can translate into thousands of dollars in extra tax — money that could have stayed in your portfolio compounding instead.
Trusts face a much lower threshold — here is what fiduciaries need to know.
While individuals enjoy thresholds of $200,000 or $250,000, estates and trusts face a threshold of roughly $15,000 for 2026 — a number that is inflation-adjusted but still tiny compared to individual thresholds. This means many trusts that were set up for perfectly legitimate estate planning reasons end up owing NIIT on virtually all of their undistributed investment income. A trust with $50,000 in interest and dividends would owe NIIT on roughly $35,000 of that income, resulting in about $1,330 in additional tax that the individual beneficiaries might not have owed at all.
The most common workaround is to distribute the trust's investment income to beneficiaries before the end of the tax year. When income is distributed, it shifts from the trust's tax return to the beneficiary's, where the much higher individual NIIT thresholds apply. A beneficiary with $150,000 in MAGI who receives $40,000 in distributed trust income would still be below the $200,000 single threshold and owe zero NIIT on that money. The same $40,000 left inside the trust would trigger NIIT. Timing these distributions before the trust's year-end is critical, and the rules around distributable net income (DNI) determine how much can be shifted.
The IRS form that calculates and reports your Net Investment Income Tax — a line-by-line overview.
Form 8960 is a single-page form that walks you through the NIIT calculation in a structured way. Part I collects your total investment income — capital gains, dividends, interest, rents, royalties, and passive income. Part II lets you subtract deductions allocable to investment income, such as investment interest expense and advisory fees. Part III calculates your modified adjusted gross income and determines how much exceeds the threshold. Part IV brings it all together by applying 3.8% to the lesser of your NII or excess MAGI. The final number flows to Schedule 2 of your Form 1040.
If you use tax preparation software, it generates Form 8960 automatically based on the income you enter. If you hire a CPA, they should include it as part of your return — but always double-check, because a missing Form 8960 can trigger IRS notices, accuracy-related penalties of 20%, and interest on the unpaid tax. The IRS has been increasing its scrutiny of NIIT compliance in recent years, so getting this form right matters more than ever.
Income, deductions, and MAGI calculation
Applies 3.8% to the applicable base
NIIT flows to your Form 1040 total
These are not loopholes — they are legitimate tax planning moves that can save you thousands each year.
Max out 401(k)/IRA contributions to lower MAGI
Shift to municipal bonds for tax-exempt income
Convert to Roth accounts for NIIT-free distributions
Harvest losses to shrink net investment income
Actively participate in businesses to convert passive income
Time capital gains across tax years strategically
Distribute trust income to individual beneficiaries
Every dollar you contribute to a traditional 401(k), 403(b), or IRA reduces your MAGI dollar for dollar, which directly shrinks the excess amount subject to NIIT. In 2026, the 401(k) contribution limit sits at $23,500 — or $31,000 if you are 50 or older. Self-employed individuals can contribute even more through SEP-IRAs and Solo 401(k)s, sometimes exceeding $60,000. For a married couple filing jointly with $270,000 in MAGI, maxing out both 401(k)s at $23,500 each would bring their MAGI down to $223,000 — below the $250,000 threshold and eliminating NIIT entirely. That is a $1,030 annual savings on top of the regular income tax deduction. The double benefit of lowering current taxes while building retirement wealth makes this the single most impactful NIIT strategy available.
Municipal bond interest is exempt from federal income tax and is completely excluded from net investment income for NIIT purposes. By moving a portion of your fixed-income allocation from taxable corporate bonds or CDs into munis, you reduce both your NII and your overall tax burden. The math gets compelling fast for high earners. A taxpayer in the 37% bracket plus 3.8% NIIT — a combined 40.8% rate on investment income — would need a taxable bond yielding 5% to match a municipal bond yielding just 2.96%. That is the tax-equivalent yield calculation, and it explains why municipal bonds are a staple in high-income portfolios. State-specific munis can also avoid state income tax, pushing the effective savings even higher for residents of high-tax states like California and New York.
Roth IRA and Roth 401(k) distributions are generally not included in MAGI and are not subject to NIIT — ever. That makes Roth accounts one of the most powerful long-term tools for sidestepping the 3.8% surtax. Yes, converting traditional funds to Roth triggers immediate taxation, and the conversion income itself could push you above the NIIT threshold in the conversion year. But the long-term payoff is substantial: once the money is in Roth, all future growth and distributions are NIIT-free. The smart move is to convert during lower-income years — perhaps after retirement but before Required Minimum Distributions begin, or during a sabbatical year when your income temporarily dips. Spreading conversions across multiple years keeps each year's conversion amount small enough to stay below the NIIT threshold, avoiding the surtax on the conversion itself.
Tax-loss harvesting directly reduces your net investment income, which is one of the two numbers in the NIIT formula. By selling investments that have lost value, you offset capital gains dollar for dollar, shrinking your NII. If your NII drops below your excess MAGI, the NIIT applies to the now-smaller NII amount — saving you 3.8 cents on every dollar of loss harvested, on top of the regular capital gains tax savings. The wash sale rule still applies: you cannot buy back the same or a substantially identical security within 30 days. Many investors harvest losses throughout the year but especially at year-end when they can assess their total gains and losses with precision. For a detailed walkthrough, check our tax loss harvesting guide, which covers timing strategies, portfolio rebalancing, and common pitfalls.
Income from businesses where you materially participate is classified as active income, not investment income, and is therefore exempt from NIIT. The IRS generally defines material participation as 500 or more hours per year of involvement, although there are alternative tests. If you own a passive stake in a business, consider increasing your involvement to meet the material participation standard. This converts what would be NIIT-subject passive income into active income that the 3.8% surtax cannot touch. Real estate professionals who meet the material participation rules can also exclude their rental income from NII — a significant benefit for those with large property portfolios. Additionally, the IRS allows you to group multiple business activities together, which can make it easier to reach the material participation threshold across your combined interests.
If you are planning to sell a significant investment, consider spreading the gains across two or more tax years instead of realizing everything at once. Selling half your position in December and the other half in January splits the gain between two tax returns, potentially keeping each year's NII and MAGI below the NIIT threshold. This is especially powerful if you are near the threshold and a single large sale would push you well over the line. Similarly, if you know next year will be a lower-income year, deferring a sale until January moves the gain into a return where you might escape NIIT entirely. The reverse also works: if you are already well above the threshold this year but expect to be below it next year, harvesting gains now means they get the 3.8% hit either way — but harvesting them next year could mean zero NIIT.
As we covered earlier, trusts face a NIIT threshold of roughly $15,000 compared to $200,000+ for individuals. One of the most effective moves a trustee can make is to distribute the trust's investment income to beneficiaries before the end of the tax year. The income then appears on the beneficiary's return instead of the trust's, where the much higher individual threshold often means zero NIIT. This strategy requires understanding the rules around distributable net income and the trust's fiscal year. But for trusts with significant investment income, the savings can run into the thousands annually — money that stays with the family rather than going to the IRS. Always coordinate with a tax professional to ensure distributions are properly documented and reported.
These errors trip up even experienced investors. Know them so you can avoid them.
Many taxpayers who owe NIIT simply do not realize they need to file Form 8960. Missing it triggers IRS notices, accuracy penalties of 20%, and interest on the unpaid amount.
401(k) and IRA distributions are not investment income for NIIT purposes, but they do count toward MAGI. Mixing up these categories leads to overpaying or underpaying the tax.
Gains above the $250K/$500K primary residence exclusion count as investment income. In hot markets, that excess can be substantial and trigger NIIT unexpectedly.
Converting too much in one year can push you above the NIIT threshold, triggering 3.8% on the conversion itself plus on your other investment income. Spreading conversions avoids this.
Trusts hit the NIIT at roughly $15,000 of income. Failing to distribute investment income to beneficiaries before year-end wastes a simple tax-saving opportunity.
You can subtract investment-related expenses from your gross investment income before calculating NII. Overlooking these deductions means paying NIIT on more income than necessary.
Understanding where NIIT fits in the bigger picture helps you plan your total tax exposure.
| Tax Type | Rate | What It Applies To | Deductible? |
|---|---|---|---|
| Long-Term Capital Gains Tax | 0%, 15%, 20% | Gains on assets held over 1 year | No |
| Short-Term Capital Gains Tax | 10%–37% | Gains on assets held 1 year or less | No |
| Net Investment Income Tax | 3.8% | NII above MAGI threshold | No |
| Medicare Surtax (Earned Income) | 0.9% | Wages and self-employment income | No |
| Depreciation Recapture | 25% | Real estate depreciation claimed | No |
Not everyone owes this tax. Here is a quick litmus test to find out if it applies to you.
Here is a detail that catches people off guard: the NIIT thresholds are fixed dollar amounts that do not adjust for inflation the way ordinary tax brackets do. When the thresholds were set in 2013, $200,000 for a single filer felt like a high-income cutoff. But after years of wage growth and inflation, more moderate earners are now crossing the line. A single filer earning $210,000 with $20,000 in dividends owes NIIT on the lesser of $20,000 or $10,000 — resulting in $380 in additional tax that they might not have budgeted for. As incomes continue to rise while the thresholds stay fixed, this problem will only get worse for more taxpayers each year.
Complete calculator for both short-term and long-term capital gains tax
Understand the 0%, 15%, and 20% long-term capital gains rates
Offset gains and reduce both capital gains tax and NIIT
Compare capital gains tax rates across all 50 states
Calculate taxes on stock sales including NIIT impact
Rental income NIIT and real estate capital gains explained