Net Investment Income Tax
Learn the 3.8% surtax on investment income for high earners and the moves that shrink or avoid it.
TL;DR
- Add 3.8%
NIITon investment income once your MAGI clears the line. - Tax the lesser of your
netInvestmentIncomeor your MAGI overage. - Shrink it by lowering
MAGIor harvesting investment losses.
What the NIIT Is
A 3.8% SurtaxAdded on top of your regular tax on investment income.
3.8% extraFunds MedicareEnacted in 2013 as part of the Affordable Care Act.
Also called the Medicare surtaxFiled on Form 8960You calculate and report it with your return.
Not withheld from paychecksFrozen ThresholdsThe income lines have not changed since 2013.
No inflation adjustment2026 Thresholds
SingleThe MAGI line for single and head of household filers.
$200,000Married Filing JointlyThe line for couples filing one return together.
$250,000Married Filing SeparatelyA lower line for spouses filing apart.
$125,000The Lesser OfTax hits the smaller of income or your overage.
min(NII, MAGI over line)In or Out of NII
CountsInterest, dividends, gains, and passive rents.
Interest, dividends, gains, rentsExcludedWages, self-employment, and IRA withdrawals.
Wages, SE, IRA/401(k) payoutsRaises MAGI AnywayExcluded income can still push you over the line.
RMDs lift MAGI, not NIIFully FreeMunicipal bond interest avoids both taxes.
Muni interest = out of NIIShrink the Surtax
Lower MAGIPre-tax contributions drop the income side.
Max 401(k) / SEP-IRAHarvest LossesLosses reduce the net investment income side.
Losses cut NII and gains taxConvert EarlyRoth money is not investment income later.
Roth withdrawals aren't NIIProject Year-EndEstimate MAGI to see if a small move clears the line.
A little under = no NIITTips
- A pre-tax 401(k) or HSA contribution that drops your
MAGIbelow the threshold can erase the NIIT entirely, since it taxes the smaller amount. - Harvest capital losses to reduce your
netInvestmentIncome, which cuts both regular capital gains tax and the 3.8% surtax.
Warnings
- The NIIT thresholds have not moved since 2013, so inflation alone pulls more people into
NIITrange every year. - Stacked on the top rate, long-term gains can reach a 23.8%
effectiveRateonce the 3.8% surtax applies.
In Practice
See how the NIIT is figured, and how one contribution can erase it.
You are married filing jointly with $300,000 of MAGI, including $60,000 of net investment income. Your threshold is $250,000.
- MAGI over the line: $300,000 - $250,000 = $50,000.
- NIIT applies to the lesser of $60,000 or $50,000 = $50,000.
- Surtax: 3.8% x $50,000 = $1,900.
- Add $50,000 to a pre-tax plan and MAGI hits $250,000, so NIIT is $0.
You owe $1,900, or nothing if you pull MAGI down to the line.
Because the tax hits the smaller number, trimming MAGI can remove it.
FAQ
It is a 3.8% surtax on investment income for higher earners, added on top of your regular tax. Congress created it in 2013 to help fund Medicare, so it is sometimes called the Medicare surtax. You figure it on Form 8960. It is not withheld, so you may need estimated payments to cover it.
It applies to the lesser of your net investment income or the amount your MAGI exceeds your threshold. Say a couple has $300,000 of MAGI and $60,000 of investment income. Their overage is $50,000, which is less than $60,000, so they owe 3.8% on $50,000, which is $1,900.
Interest, dividends, capital gains, rental income, and income from businesses you do not actively run. Wages, self-employment income, and IRA or 401(k) withdrawals are excluded, though those withdrawals still raise your MAGI and can push investment income over the line. Municipal bond interest escapes it entirely.
Lower either your net investment income or your MAGI. Maxing a 401(k) or SEP-IRA reduces MAGI, tax-loss harvesting reduces investment income, and municipal bonds keep interest out of the calculation. Because the tax hits the smaller of two numbers, a modest change can sometimes remove it completely.