The short answer
The net investment income tax (NIIT) is a separate 3.8% federal tax on investment income for people with higher incomes. It applies only when your modified adjusted gross income (MAGI) is over a threshold for your filing status and you have net investment income. You figure it on Form 8960 and pay it with your Form 1040.
How the 3.8% is calculated
For an individual, the NIIT is 3.8% of the smaller of:
- your net investment income, or
- the amount by which your MAGI exceeds your threshold.
MAGI is generally your adjusted gross income (AGI). It is higher than AGI only if you exclude foreign earned income (or have certain foreign corporation investments), in which case special rules add those amounts back.
Thresholds for 2025 and 2026
| Filing status | MAGI threshold (2025 and 2026) |
|---|---|
| Married filing jointly | $250,000 |
| Qualifying surviving spouse | $250,000 |
| Married filing separately | $125,000 |
| Single | $200,000 |
| Head of household | $200,000 |
These amounts are set by law and, as the IRS notes, are not indexed for inflation. The 2025 Instructions for Form 8960 and the 2026 draft instructions list the same amounts.
What counts as net investment income
| Generally included | Generally excluded |
|---|---|
| Interest and dividends | Wages and self-employment income |
| Capital gains from stocks, bonds, and mutual funds, and capital gain distributions | Operating income from a business that is not a passive activity |
| Rental and royalty income (unless from a non-passive trade or business) | Social Security benefits and unemployment compensation |
| Gain from selling investment real estate, including a second home | Tax-exempt interest, such as municipal bond interest |
| Non-qualified annuities | Distributions from qualified plans and IRAs (sections 401(a), 403(a), 403(b), 408, 408A, 457(b)) |
| Income from passive businesses and from trading financial instruments or commodities | Home-sale gain excluded under the main-home exclusion |
Net investment income is gross investment income minus deductions properly allocable to it, such as investment interest. Investment advisory and brokerage fees are miscellaneous itemized deductions, which are not deductible, so they cannot reduce net investment income either.
Capital gains, rental income, and home sales
- Capital gains: gains from selling stocks, bonds, and funds are investment income to the extent they are not offset by capital losses.
- Rental income: rents are generally investment income unless they come from a trade or business that is not a passive activity for you. Whether a rental is passive depends on facts such as your participation, so a rental sale does not automatically trigger the NIIT.
- Home sales: gain you exclude under the main-home exclusion (up to $250,000, or $500,000 for many married couples) is not subject to the NIIT. Any taxable gain above the exclusion is investment income.
Retirement distributions and MAGI
IRA and retirement plan distributions are not net investment income. However, taxable distributions are included in AGI, so they can increase your MAGI. A large IRA withdrawal can therefore cause your other investment income to become subject to the NIIT.
Examples (illustrative)
Sam, single, 2025: wages of $180,000, interest and dividends of $15,000, and a $40,000 long-term gain from selling stock. Sam has no adjustments, so MAGI equals AGI.
| Step | Amount |
|---|---|
| MAGI ($180,000 + $15,000 + $40,000) | $235,000 |
| Net investment income ($15,000 + $40,000) | $55,000 |
| MAGI over the $200,000 threshold | $35,000 |
| NIIT: 3.8% × the smaller amount ($35,000) | $1,330 |
Rosa and Tom, married filing jointly, 2026: wages of $190,000 and $40,000 of net investment income give a MAGI of $230,000, below the $250,000 threshold, so no NIIT. If they also take a $50,000 taxable IRA distribution, their MAGI becomes $280,000. Their net investment income is still $40,000, because the IRA distribution is not investment income, and their MAGI is $30,000 over the threshold. Their NIIT is 3.8% × $30,000 = $1,140.
Home sale (from the IRS Q&A): a married couple filing jointly sells their main home for a $600,000 gain and excludes $500,000, leaving $100,000 of taxable gain. With $125,000 of other investment income, their net investment income is $225,000. Their MAGI of $300,000 is $50,000 over the threshold, so their NIIT is 3.8% × $50,000 = $1,900.
Form 8960 and paying the tax
- Figure the tax on Form 8960 and attach it to your Form 1040. The NIIT is reported on Schedule 2 (Form 1040).
- The NIIT is subject to the estimated tax rules. If you expect to owe it, consider increasing your withholding or making estimated tax payments to avoid an underpayment penalty.
- Married to a nonresident: if you are a U.S. citizen or resident married to a nonresident alien, you are treated as married filing separately for the NIIT unless you make a special election. Nonresident aliens themselves are not subject to the NIIT.
Changes for 2026
The 2026 draft Instructions for Form 8960 say that, under section 70111 of P.L. 119-21 (enacted July 4, 2025), certain itemized deductions — including investment interest — are no longer exempt from the section 68 overall limitation starting in 2026. The draft adds a new worksheet for lines 9 and 10 of Form 8960 and says the limitation generally affects people in the highest tax bracket. Because these instructions are still a draft, check the final 2026 Form 8960 instructions before filing. See investment interest expense.
Common mistakes
- Applying 3.8% to all investment income instead of to the smaller of the two amounts.
- Using an inflation-adjusted threshold — the thresholds do not change each year.
- Forgetting the qualifying surviving spouse threshold of $250,000.
- Counting IRA distributions as investment income, or forgetting that they raise MAGI.
- Assuming every rental sale is subject to the NIIT without checking whether the activity is passive and whether MAGI exceeds the threshold.
Whether rental or business income is passive, the real estate professional and trader rules, controlled foreign corporations and PFICs, and estates and trusts all have special NIIT rules that this guide does not cover. State tax treatment is also not covered.