Net Investment Income Tax (NIIT)
The 3.8% surtax on investment income for high earners — what it applies to and strategies to minimize it.
TL;DR
- 01Add 3.8% NIIT atop regular tax on investment income.
- 02Apply NIIT to the lesser of NII or MAGI excess.
- 03Reduce NIIT through Roth conversions and tax-loss harvesting.
Tips
- 01Reduce MAGI slightly below the threshold with 401(k) contributions to potentially avoid NIIT entirely, since it taxes only the smaller amount.
- 02Harvest capital losses each year to offset gains and shrink the net investment income subject to the 3.8% surtax.
- 03Increase material participation in a business you own, since active income is excluded from net investment income entirely.
Warnings
- 01Rental income generally faces NIIT unless you qualify as a real estate professional, which requires 750+ hours of real estate work.
- 02The NIIT thresholds have stayed unchanged since 2013, so inflation alone pulls more taxpayers into NIIT territory every year.
- 03Long-term capital gains can reach a 23.8% effective rate once NIIT stacks on top of the regular 20% top rate.
What the NIIT Is
The Net Investment Income Tax (NIIT), also called the Medicare surtax, is a 3.8% additional tax on investment income for taxpayers whose income exceeds certain thresholds. It was enacted as part of the Affordable Care Act in 2013 to help fund Medicare.
The NIIT is reported on Form 8960 and added to your regular income tax liability. It is not subject to withholding — you may need to make estimated tax payments to cover it.
- The effective total tax on long-term capital gains can reach 23.8% (20% top LTCG rate + 3.8% NIIT).
- On ordinary investment income in the top bracket, it can push the marginal rate to 40.8% (37% + 3.8%).
- The thresholds are not indexed for inflation — they have remained unchanged since 2013, pulling more taxpayers into NIIT territory each year.
Income Thresholds (2026)
The NIIT applies to the lesser of your net investment income or the amount your MAGI exceeds the applicable threshold.
| Filing Status | MAGI Threshold |
|---|---|
| Single / Head of Household | $200,000 |
| Married Filing Jointly | $250,000 |
| Married Filing Separately | $125,000 |
| Estates and Trusts | $16,000 (2026, inflation-adjusted) |
Example: A married couple has MAGI of $300,000, of which $60,000 is net investment income. The NIIT applies to the lesser of $60,000 (NII) or $50,000 ($300,000 − $250,000 threshold). They owe 3.8% × $50,000 = $1,900 in NIIT.
What Counts as Net Investment Income
Net investment income includes most passive investment returns, reduced by deductible investment expenses.
| Income Type | Subject to NIIT? |
|---|---|
| Interest income | Yes |
| Dividends (qualified and ordinary) | Yes |
| Capital gains (short and long-term) | Yes |
| Rental income (passive) | Yes |
| Passive business income (no material participation) | Yes |
| Annuity distributions (non-qualified portion) | Yes |
Deductible investment expenses — such as investment advisory fees (pre-2018 rules for some situations), margin interest, and state income tax allocable to investment income — reduce NII before the 3.8% is applied.
What Is Excluded
Several income types are excluded from the NIIT calculation, which presents planning opportunities.
- Wages and self-employment income: Subject to payroll taxes but not NIIT.
- IRA and 401(k) distributions: Ordinary income but excluded from NIIT (though they increase MAGI and can push investment income over the threshold).
- Social Security benefits: Excluded from NII.
- Tax-exempt interest: Not included in NII, but does count toward MAGI.
- Active business income: Income from a trade or business in which you materially participate is not NII.
- Qualified opportunity zone gains: Deferred or excluded gains from QOZ investments are not subject to NIIT during the deferral period.
Strategies to Reduce NIIT
Reducing NIIT requires either lowering net investment income or reducing MAGI so less of the investment income falls into the taxable zone.
| Strategy | Mechanism | Best For |
|---|---|---|
| Max out 401(k) / SEP-IRA contributions | Reduces MAGI directly | High-earning employees and self-employed |
| Tax-loss harvesting | Reduces net capital gains | Taxable investment accounts |
| Roth conversions in lower-income years | Shifts IRA to Roth; future Roth withdrawals not NII | Early retirees, pre-RMD years |
| Invest in municipal bonds | Interest excluded from NII (but counts toward MAGI) | High-bracket investors in taxable accounts |
| Material participation in business | Active income excluded from NII | Business owners increasing involvement |
| Qualified opportunity zone (QOZ) investments | Defers and potentially excludes capital gains | Large capital gain realization events |
Running a year-end projection to estimate your MAGI relative to the threshold is especially valuable — a small 401(k) contribution or charitable deduction may pull you below the NIIT threshold entirely.
FAQ
The NIIT, also called the Medicare surtax, is a 3.8% additional tax on investment income for taxpayers above certain MAGI thresholds. Congress enacted it in 2013 as part of the Affordable Care Act to help fund Medicare. You report it on Form 8960 and add it to your regular income tax liability.
NIIT applies to the lesser of your net investment income or the amount your MAGI exceeds the threshold for your filing status. For example, a married couple with $300,000 MAGI and $60,000 of NII owes 3.8% on $50,000, the smaller of the two figures, for $1,900 in NIIT.
Wages, self-employment income, and IRA or 401(k) distributions are excluded, even though they still count toward MAGI. Active business income from a trade you materially participate in is also excluded. Social Security benefits and qualified opportunity zone gains during the deferral period escape NIIT as well.
Lower either your net investment income or your MAGI. Maxing out 401(k) or SEP-IRA contributions reduces MAGI directly, while tax-loss harvesting reduces net capital gains. Materially participating in a business you own also moves that income outside the NIIT calculation.