The Net Investment Income Tax (NIIT) is a 3.8% Medicare surtax imposed on the net investment income of high-income individuals, estates, and trusts. Established under the Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, it took effect in 2013 as a means of generating revenue to help fund expanded healthcare coverage. Unlike ordinary income tax, the NIIT specifically targets investment income and only applies once your income exceeds certain thresholds.
Income Thresholds for NIIT
The NIIT applies to taxpayers with a modified adjusted gross income (MAGI) above these thresholds for the 2025 tax year:
- $200,000 for single filers and heads of household
- $250,000 for married couples filing jointly and qualifying widow(er)s
- $125,000 for married individuals filing separately
Your MAGI generally equals your adjusted gross income (AGI) with certain additions, usually close to your AGI.
What Is Considered Net Investment Income?
Net investment income includes a variety of passive income sources, such as:
- Interest from savings accounts, CDs, bonds, and other investments
- Dividends from stocks and mutual funds
- Capital gains from selling assets such as stocks, bonds, mutual funds, and investment real estate (excluding most gains from the sale of a personal residence)
- Rental and royalty income from real estate and natural resources
- Non-qualified annuities distributions
- Income from passive business activities in which you do not materially participate
However, wages, self-employment income, Social Security benefits, tax-exempt interest, and income from active businesses are excluded from NIIT.
How Is the NIIT Calculated?
The tax rate of 3.8% applies to the lesser of:
- Your net investment income, or
- The amount by which your MAGI exceeds the applicable threshold
For example, if your MAGI exceeds the threshold by $30,000 and your net investment income is $40,000, the 3.8% tax applies to $30,000.
Example Calculation
Consider Sarah and Tom, a married couple filing jointly with a MAGI of $280,000 and $40,000 in net investment income. Their NIIT is calculated as follows:
- Excess MAGI: $280,000 – $250,000 = $30,000
- NIIT taxable amount: Lesser of $30,000 or $40,000 = $30,000
- NIIT owed: $30,000 x 3.8% = $1,140
Who Must Pay the NIIT?
The NIIT affects:
- High-income individuals above the income thresholds
- Estates and trusts with undistributed net investment income exceeding estate and trust income thresholds
This tax is in addition to regular income and capital gains taxes.
Reporting the NIIT
Taxpayers report NIIT using IRS Form 8960, “Net Investment Income Tax – Individuals, Estates, and Trusts,” filed along with Form 1040.
Strategies to Manage NIIT Exposure
Some approaches to potentially reduce NIIT liability include:
- Investing within tax-advantaged accounts such as 401(k)s and IRAs, where earnings are typically exempt from NIIT
- Investing in tax-exempt municipal bonds, which generally produce interest income excluded from NIIT
- Employing tax loss harvesting to offset capital gains and reduce net investment income (see our Tax Loss Harvesting guide)
- Carefully managing income timing to avoid crossing MAGI thresholds
- Understanding the distinction between active and passive income; income from active participation in a trade or business is typically exempt from NIIT (learn more about Passive Income)
Common Misconceptions
- NIIT isn’t only for the ultra-wealthy; many upper middle-class taxpayers with substantial investments can be subject to it.
- NIIT does not replace capital gains tax; it is an additional tax on certain investment income.
- Not all investment income is subject to NIIT; for example, tax-exempt interest from municipal bonds is excluded.
Frequently Asked Questions
Q1: Does selling my primary home trigger NIIT?
Generally, no, if you qualify for the capital gains exclusion on the sale of a primary residence ($250,000 for singles, $500,000 for married filing jointly), the profit is excluded from NIIT.
Q2: How is NIIT different from Medicare payroll taxes?
Medicare payroll taxes apply to earned income like wages and self-employment income, while the NIIT applies to investment income above income thresholds.
Q3: How do I file the NIIT?
Use IRS Form 8960, attached to your individual tax return (Form 1040).
Q4: Are retirement account withdrawals subject to NIIT?
Distributions from qualified plans (e.g., 401(k), IRAs) are usually not subject to NIIT, but income from non-qualified annuities might be.
Additional Resources
For official IRS guidance, visit the IRS Net Investment Income Tax Topic 559 and About Form 8960.
Understanding the NIIT is essential for high earners with investment income to effectively plan their tax situations and potentially minimize the impact of this surtax.
