Net Investment Income Tax (NIIT)

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.

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	$15,200 (2025, 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.

Tip: Because the tax applies to the lesser of NII or the MAGI excess, you may be able to avoid NIIT entirely by reducing MAGI even slightly below the threshold through 401(k) contributions or other above-the-line deductions.

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.

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.

Warning: Rental income is generally subject to NIIT unless you qualify as a real estate professional under IRS rules (750+ hours of real estate activity, more than half your working time). This is difficult to achieve and commonly audited.

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.