What is the Net Investment Income Tax (NIIT)
The Net Investment Income Tax (NIIT) is an additional 3.8% federal tax on investment income — capital gains, dividends, interest, and rental income — for taxpayers whose Modified AGI exceeds $200,000 (single) or $250,000 (married filing jointly).
The Net Investment Income Tax (NIIT) is a 3.8% federal surtax on certain investment income that applies to taxpayers above specific income thresholds. Created by the Affordable Care Act to help fund Medicare expansion, it is separate from — and in addition to — the regular capital gains tax and income tax on investment income.
The 3.8% rate means that high-income investors effectively pay higher rates on their investment income. A taxpayer otherwise subject to a 15% long-term capital gains rate may actually owe 18.8% on those gains once the NIIT is added.
Income Thresholds (Not Inflation-Adjusted)
Unlike most tax thresholds, the NIIT thresholds are not adjusted for inflation, meaning more taxpayers are caught by the tax over time:
| Filing Status | NIIT Threshold |
|---|---|
| Single | $200,000 |
| Married Filing Jointly | $250,000 |
| Married Filing Separately | $125,000 |
| Head of Household | $200,000 |
What Counts as Net Investment Income
The NIIT applies to the lesser of (a) your net investment income or (b) the amount by which your Modified Adjusted Gross Income (MAGI) exceeds the threshold.
Items that ARE subject to NIIT:
- Capital gains (short-term and long-term)
- Ordinary dividends and qualified dividends
- Interest income (taxable bonds, bank accounts)
- Rental income (net of expenses)
- Royalties
- Income from passive activities (partnerships, S corps in which you don't materially participate)
- Net gains from the sale of passive partnership or S-corp interests
Items EXEMPT from NIIT:
- Wages, salaries, and self-employment income (subject to FICA, not NIIT)
- Active business income where you materially participate
- Social Security benefits (even if partially taxable)
- Tax-exempt interest (municipal bonds)
- Distributions from IRAs and 401(k)s (qualified)
- Excluded gain on primary home sale (first $250,000/$500,000 of gain)
- Income from certain trades or businesses
Calculating the NIIT
The tax applies to the lesser of your net investment income or the excess of MAGI over the threshold:
Example: Married couple with $180,000 in wages and $100,000 in net capital gains. MAGI = $280,000.
- Excess over $250,000 threshold = $30,000
- Net investment income = $100,000
- Lesser amount = $30,000
- NIIT = $30,000 × 3.8% = $1,140
Strategies to Reduce NIIT
Since the NIIT applies to investment income above the threshold, reducing either MAGI or net investment income reduces exposure:
- Traditional retirement contributions: Reducing MAGI through 401(k) or traditional IRA contributions may keep you below or reduce your exposure to the NIIT threshold
- Tax-loss harvesting: Realized losses offset realized gains, reducing net investment income
- Municipal bonds: Tax-exempt interest is excluded from net investment income
- Active real estate participation: Material participation in rental activities can convert passive (NIIT-subject) income to active income
- Installment sales: Spreading gain recognition across multiple years may reduce MAGI below the threshold in any single year
NIIT vs. Additional Medicare Tax
These are two related but separate taxes created by the ACA:
| Tax | Rate | Who It Applies To | What It Applies To |
|---|---|---|---|
| NIIT | 3.8% | High-income earners | Investment income |
| Additional Medicare Tax | 0.9% | High-income earners | Wages and self-employment income |
The NIIT is reported on Form 8960 and added to your income tax on Form 1040. If you're in the phase-out zones or near the thresholds, precise planning around year-end income recognition can meaningfully reduce exposure.