Sell a stock at a big profit, collect a year of dividends, or rent out a property, and your income tax bracket isn't the only bill waiting. Once your modified adjusted gross income (MAGI) crosses $200,000 (single or head of household) or $250,000 (married filing jointly), the IRS layers on an extra 3.8% Net Investment Income Tax (NIIT). It sits on top of your regular capital gains or income tax rate. That can turn a 20% top long-term capital gains rate into an effective 23.8%. The NIIT has applied since 2013. Its thresholds have never been adjusted for inflation, so more filers cross them every year without changing a single financial habit. Here's exactly who owes it, how it's calculated, and the legitimate ways to reduce it.
Run your numbers first in our capital gains tax calculator to see your base rate before adding the NIIT on top.
What Is the Net Investment Income Tax?
The NIIT is a 3.8% surtax created by the Health Care and Education Reconciliation Act of 2010 (the companion legislation to the Affordable Care Act) and in effect since January 1, 2013. It doesn't replace your regular income tax or capital gains tax — it stacks on top of them, and only for taxpayers above specific income thresholds (IRS, Net Investment Income Tax).
Individuals calculate and report it on Form 8960, attached to Form 1040. Estates and trusts owe it too, once their adjusted gross income exceeds the dollar amount where the top trust income tax bracket begins (IRS Topic No. 559, Net Investment Income Tax). For 2026 that figure is $16,000, and unlike the individual thresholds below it is adjusted annually for inflation (IRS Rev. Proc. 2025-32, Table 5). That is a far lower bar than the individual thresholds, which is why irrevocable trusts holding investment assets often owe NIIT even in modest years.
Who Owes the NIIT? 2026 MAGI Thresholds
The thresholds are set by filing status and have stayed fixed since the tax began in 2013 — they are not indexed for inflation the way ordinary tax brackets are:
| Filing status | 2026 MAGI threshold |
|---|---|
| Single / Head of household | $200,000 |
| Married filing jointly / Qualifying surviving spouse | $250,000 |
| Married filing separately | $125,000 |
Because these numbers never move, they quietly capture more taxpayers each year as wages and investment values rise with inflation. Some call it "bracket creep," even though there's no bracket to creep into or out of here. A household earning $200,000 today has less real purchasing power than $200,000 did in 2013, but the NIIT doesn't care.
What Counts as Net Investment Income
Net investment income is a specific, defined category — not all income counts, and getting this distinction right is the single most common point of confusion.
Included (subject to NIIT):
- Interest (savings accounts, CDs, taxable bonds)
- Dividends, both ordinary and qualified
- Capital gains — short-term and long-term, from stocks, funds, and investment real estate
- Rental and royalty income (unless it rises to a non-passive trade or business you materially participate in)
- Non-qualified annuity income
- Income from passive business activities or trading in financial instruments
Excluded (never subject to NIIT):
- Wages and salary
- Self-employment income (though it can still owe the separate 0.9% Additional Medicare Tax — see below)
- Social Security benefits
- Tax-exempt municipal bond interest
- Distributions from qualified retirement plans — 401(k), traditional IRA, Roth IRA
- Gain on the sale of a primary residence, up to the standard exclusion ($250,000 single / $500,000 married filing jointly) under IRC §121 (IRS Topic No. 701, Sale of Your Home)
(IRS, Net Investment Income Tax). That retirement-account exclusion is a big deal: money growing inside a 401(k) or IRA never touches the NIIT while it's inside the account, and Roth withdrawals in retirement stay excluded permanently.
How the 3.8% Tax Is Actually Calculated
The NIIT isn't simply "3.8% of your investment income." The IRS applies it to the lesser of two numbers: your net investment income, or the amount by which your MAGI exceeds the threshold for your filing status (IRS, Net Investment Income Tax). That "lesser of" rule matters — it means the tax can never exceed 3.8% of your actual investment income, even if your total income is far above the threshold.
Example 1: Investment income smaller than the excess
A single filer has $180,000 in wages and $40,000 in dividends and capital gains, for a MAGI of $220,000.
- Excess over the $200,000 threshold: $220,000 − $200,000 = $20,000
- Net investment income: $40,000
- NIIT applies to the lesser figure: $20,000
- Tax owed: 3.8% × $20,000 = $760
Example 2: Investment income larger than the excess
A married couple filing jointly has $260,000 in combined wages and $90,000 in rental and dividend income, for a MAGI of $350,000.
- Excess over the $250,000 threshold: $350,000 − $250,000 = $100,000
- Net investment income: $90,000
- NIIT applies to the lesser figure: $90,000
- Tax owed: 3.8% × $90,000 = $3,420
| Scenario | MAGI | Excess over threshold | Net investment income | NIIT owed |
|---|---|---|---|---|
| Example 1 (single) | $220,000 | $20,000 | $40,000 | $760 |
| Example 2 (MFJ) | $350,000 | $100,000 | $90,000 | $3,420 |
The Trap: A One-Time Sale Can Trigger It Even on a Modest Salary
The scenario that surprises the most people isn't a high-earning executive — it's someone with an ordinary income who sells an appreciated asset. Say a single filer earns $90,000 in wages and sells stock held for over a decade with a $180,000 long-term gain, pushing MAGI to $270,000.
- Excess over the $200,000 threshold: $270,000 − $200,000 = $70,000
- Net investment income (the gain): $180,000
- NIIT applies to the lesser figure: $70,000
- Tax owed: 3.8% × $70,000 = $2,660 — on top of the regular 15% or 20% long-term capital gains tax
See our capital gains tax guide for how the base rate stacks with this surtax — together they can push a top long-term rate of 20% to an effective 23.8%.
Who Actually Pays the NIIT
The NIIT isn't a niche tax. In tax year 2023, 8.1 million returns paid a combined $39.3 billion in NIIT (IRS Statistics of Income, Table 3.3, Tax Year 2023). Summed across its first eleven years, 2013 through 2023, the tax has raised $339.5 billion (IRS SOI Table 3.3, Tax Years 2013–2023). Collections are volatile year to year because they track capital gains realizations. 2021, a record year for stock sales, remains the single largest year on record for NIIT revenue at a preliminary $59.8 billion (Congressional Research Service, IF11820).
Who pays it skews toward the upper-middle and top of the income distribution, but not exclusively the ultra-wealthy. In tax year 2019, filers with income between $200,000 and $500,000 made up roughly 69.6% of all taxpayers who owed the NIIT by headcount. Filers earning $10 million or more, by contrast, accounted for about 31.5% of total NIIT dollars collected that same year (Congressional Research Service, IF11820). In plain terms: most people who pay the NIIT are upper-middle-income households with a big investment year, not billionaires — but a disproportionate share of the dollars still comes from the very top.
NIIT vs. the Additional Medicare Tax: Don't Confuse the Two
The NIIT is frequently mixed up with its sibling ACA surtax, the 0.9% Additional Medicare Tax. The two use the same dollar thresholds ($200,000 / $250,000 / $125,000) but apply to opposite kinds of income:
| Net Investment Income Tax | Additional Medicare Tax | |
|---|---|---|
| Rate | 3.8% | 0.9% |
| Applies to | Investment income (gains, dividends, interest, rental) | Wages and self-employment income |
| Thresholds | $200K single / $250K MFJ / $125K MFS | Same thresholds |
A high earner with both a big salary and significant investment income can owe both surtaxes in the same year, on different slices of their income (IRS, Additional Medicare Tax Q&A).
How to Reduce or Avoid the NIIT
None of these strategies are exotic — they're the same moves that reduce MAGI or investment income generally, applied with the NIIT threshold specifically in mind:
- Max out tax-deferred retirement accounts. Traditional 401(k) and IRA contributions reduce MAGI dollar-for-dollar, and growth inside the account is never subject to NIIT. Compare account types in our Roth 401(k) vs Traditional 401(k) guide.
- Harvest capital losses. Realized losses offset realized gains dollar-for-dollar, directly shrinking net investment income before the NIIT calculation even starts. See our full tax-loss harvesting guide for the mechanics and the wash-sale rule.
- Hold municipal bonds. Interest from municipal bonds is excluded from both regular federal income tax and NIIT, making them relatively more attractive once you're near the threshold.
- Contribute to an HSA. HSA contributions are deductible, reducing MAGI, on top of the account's other tax-free growth and withdrawal benefits.
- Donate appreciated securities instead of cash. Gifting long-held stock to a qualified charity avoids realizing the capital gain altogether, while still potentially claiming a deduction.
- Time large gains deliberately. If you control the timing of a gain — selling a business, exercising options, liquidating a concentrated position — spread the sale across multiple tax years. Each year's MAGI then stays further from the threshold than it would if you realized it all at once.
Frequently Asked Questions
Does the NIIT apply to my 401(k) or IRA?
No. Growth and distributions from qualified retirement plans — 401(k)s, traditional IRAs, and Roth IRAs — are excluded from net investment income entirely, whether the money stays in the account or is withdrawn under normal rules.
Does selling my primary home trigger the NIIT?
Only on the portion of gain that exceeds the standard home-sale exclusion ($250,000 single, $500,000 married filing jointly). Gain within that exclusion isn't included in net investment income at all.
Is rental income always subject to NIIT?
Usually, yes — rental income is treated as passive investment income by default. The exception is if you qualify as a real estate professional under IRS rules and materially participate in the activity, in which case it can be treated as non-passive trade or business income instead.
Can the NIIT thresholds change?
Congress would have to act to change them. They aren't automatically adjusted for inflation the way ordinary tax brackets are, and have stayed at $200,000 / $250,000 / $125,000 since the tax took effect in 2013.
Do I owe NIIT on self-employment income?
No — self-employment income itself is excluded from NIIT (it can instead trigger the separate 0.9% Additional Medicare Tax above the same thresholds). But investment income you hold personally, separate from the business, is still subject to NIIT under the normal rules.
This article is for general informational purposes only and is not tax or legal advice. Thresholds reflect 2026 figures under current law and are not indexed for inflation; consult a qualified tax professional and the current-year Form 8960 instructions before making decisions based on your specific situation.
Check where your income lands with our tax bracket calculator, then run your investment gains through the capital gains tax calculator to see the base rate before adding the 3.8% NIIT on top.
Sources: IRS, Net Investment Income Tax; Congressional Research Service, "The 3.8% Net Investment Income Tax: Overview, Data, and Policy Options" (IF11820); IRS, Questions and Answers for the Additional Medicare Tax; IRS Statistics of Income, Individual Income Tax Returns Complete Report (Publication 1304), Table 3.3; IRS Rev. Proc. 2025-32.