A Guide to the Net Investment Income Tax (NIIT)

The net investment income tax is a 3.8% levy on certain investment earnings received by individuals, estates and trusts with income above IRS-set thresholds. It applies to sources such as dividends, capital gains and rental income. Introduced in 2013 through the Health Care and Education Reconciliation Act, the tax kicks depends on the filer’s modified adjusted gross income (MAGI) and the amount of net investment income they receive.

For more help with tax planning, consider working with a financial advisor. You can connect with advisors who serve your area by using SmartAsset’s free advisor matching tool.

Understanding the Net Investment Income Tax (NIIT)

The net investment income tax (NIIT) is a 3.8% surtax that applies to certain individuals, estates and trusts with income above specific thresholds. It is calculated based on the lesser of a taxpayer’s net investment income or the amount by which their MAGI exceeds the IRS threshold for their filing status.

The tax was enacted as part of the Health Care and Education Reconciliation Act of 2010 and took effect on January 1, 2013. It was introduced to help support healthcare-related funding and has remained in place ever since.

Since its implementation, the tax has affected high-income households with significant investment earnings, including capital gains, dividends, rental income and other passive income sources.

While it functions separately from the regular income tax system, the NIIT can create additional liability for taxpayers who cross certain income thresholds. Because it hinges on both the type and amount of income, its impact can vary widely depending on a taxpayer’s financial profile.

Who’s Subject to the Net Investment Income Tax?

Individuals are frequent net investment income taxpayers, mostly because they represent a large portion of the investment market. Only U.S. citizens and resident aliens with net investment income that exceeds the MAGI thresholds in the table below need to pay the NIIT, though. On the other hand, non-resident aliens are not subject to this tax. The only exception is if they elect to be treated as a resident so they can file jointly with their U.S. citizen or resident spouse.

Net Investment Income Tax (NIIT) Thresholds

Your Filing Status	Threshold Amount
Single	$200,000
Married Filing Jointly	$250,000
Married Filing Separately	$125,000
Head of Household (With Qualifying Person)	$200,000
Qualifying Widow(er) With Dependent Child	$250,000

Estates and trusts may also need to pay the NIIT. This pertains to estates and trusts that have both undistributed net investment income and adjusted gross income past the dollar amount at which the highest estate/trust tax bracket begins for the current tax year. For 2025, this amount is $15,650, up from $15,200 in 2024.

The IRS stipulates that there are a few types of trusts not subject to the NIIT, including:

Trusts that are exempt from income taxes
Grantor trusts
Trusts not technically classified as “trusts” for federal income tax purposes
Perpetual care trusts
Electing Alaska Native Settlement Trusts

What Is Net Investment Income?

Interest, capital gains, and dividends are all subject to the net investment income tax.

In order to turn a profit, investors aim to buy investments at a lower price than they’ll eventually sell them for. However, there are many different kinds of investments, and not all of them are included as net investment income. Here’s a rundown of what is and isn’t subject to the NIIT:

Net Investment Income (NII) Inclusions and Exclusions

Included as NII	– Interest – Capital gains – Dividends – Income from passive investment activities – Non-qualified annuity distributions – Rental and royalty income
Excluded from NII	– Wages – Unemployment payments – Self-employment income – Social Security benefits – Distributions from some qualified retirement plans – Alimony – Tax-exempt interest – Operating income from non-passive businesses – Excluded capital gains earned from the sale of your primary residence – Alaska Permanent Fund Dividends

How to Calculate NIIT

Your MAGI determines if you owe the net investment income tax. You can compute your MAGI by taking your adjusted gross income (AGI) and adding back in a few deductions, like IRA contributions, passive loss or income, taxable Social Security payments, student loan interest and more. You can find your AGI on Form 1040, Line 8b. If your MAGI is higher than the statutory threshold for your filing status, then you must pay the net investment income tax.

Next, you’ll need to figure out your net investment income based on the included earnings listed above. But before you can calculate your NII, you must know your gross investment income. Once you have that, subtracting eligible deductions from your gross investment income will provide you your NII. Some common investment deductions are brokerage fees, investment advisory fees, tax preparation charges, local and state income taxes, fiduciary expenses, investment interest expenses and any costs involved with rental and royalty income.

Earlier we stated that you pay the NIIT based on the lesser of your net investment income or the amount by which your MAGI surpasses the filing status-based thresholds imposed by the IRS. In simpler terms, the dollar amount that’s subject to this 3.8% tax, will vary as follows:

If your net investment income is lower than the amount by which you exceeded the statutory threshold, the tax applies to your NII.
If your net investment income is higher than the amount by which you exceeded the statutory threshold, the tax applies to that exceeding value.

Here are a few examples of NIIT:

Examples of Net Investment Income Tax

Filing Status	MAGI Statutory Threshold	Your Income	Amount Subject to the NIIT	Taxes Owed
Single	$200K	$120K (wages) + $40K (NII) = $160K (MAGI)	$0	$0
Single	$200K	$170K (wages) + $80K (NII) = $250K (MAGI)	$50K	$1,900
Married Filing Jointly	$250K	$220K (wages) + $45K (NII) = $265K (MAGI)	$15K	$570
Married Filing Separately	$125K	$150K (wages) + $40K (NII) = $190K (MAGI)	$40K	$1,520

How to File the NIIT

A couple discussing the net investment income tax with their financial advisor.

IRS Form 8960 is devoted to the calculation of the net investment income tax. When you’re ready to report and pay your NIIT, you’ll do so via Form 1040. Estates and trusts looking to file the NIIT should use Form 1041. If you come across issues or specific questions related to this tax, you may want to consult a financial advisor or a certified public accountant (CPA).

According to the IRS, if you believe that you will pay the NIIT for the current tax year, you must account for it ahead of time. This involves either adjusting your income tax withholding or setting up quarterly estimated payments. Although this requires extra work, it could save you from underpaying the IRS come tax time.

Bottom Line

The net investment income tax (NIIT) adds an additional layer to tax planning for higher-income individuals, estates and trusts. Whether it applies depends on a combination of income thresholds and the types of earnings involved. Understanding how the tax works and how to calculate it can help investors manage their overall tax exposure.

Tips for Managing Your Investments

A financial advisor can help manage your investment portfolio. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
In order to accurately plan your financial future, you should calculate what kind of returns you’ll need from an investment portfolio to reach your goals. There are a few ways to do this, including SmartAsset’s investment calculator or the rule of 72.