The Net Investment Income Tax (NIIT) is a 3.8% surtax that applies on top of your regular income tax and capital gains tax, and it exists specifically to tax investment income for higher earners. It's been in place since 2013, and unlike almost every other dollar figure in the tax code, its thresholds have never been adjusted for inflation — which means more people cross into NIIT territory every year without their investment strategy actually changing.
The Thresholds (Unchanged Since 2013)
NIIT applies once your Modified Adjusted Gross Income (MAGI) exceeds these amounts:
| Filing Status | MAGI Threshold |
|---|---|
| Married Filing Jointly / Surviving Spouse | $250,000 |
| Single / Head of Household | $200,000 |
| Married Filing Separately | $125,000 |
These are set directly in the statute (IRC §1411) with no inflation-indexing mechanism — a deliberate design choice, not an oversight. Every other threshold in this calculator's federal engine moves a little each year with Rev. Proc. updates; this one has sat exactly here since the tax first took effect, quietly pulling in more filers as wages and investment portfolios grow over time.
How the Calculation Actually Works
NIIT isn't simply 3.8% of everything over the threshold. The tax applies to the lesser of two numbers:
- Your net investment income for the year, or
- The amount by which your MAGI exceeds the threshold for your filing status
Whichever of those two is smaller is what actually gets taxed at 3.8%. In practice, this means someone whose MAGI is only slightly over the threshold pays NIIT on a small slice of income even if they have substantial investment income — the tax can never apply to more than the excess over the threshold.
What Counts as Net Investment Income
- Interest, dividends, and annuity income
- Capital gains — including long-term capital gains from selling stocks, funds, or property
- Rental and royalty income (unless you're a real-estate professional actively engaged in the trade or business)
- Income from passive business activities — a business you have an ownership stake in but don't materially participate in
- Income from trading in financial instruments or commodities
Deductions properly allocable to that income — investment interest expense, advisory fees tied to the investment, state income tax attributable to the investment income — reduce the net investment income figure before the 3.8% applies.
What's Explicitly Excluded
- Wages and self-employment income (these are hit by regular income tax and FICA/SE tax instead, not NIIT)
- Distributions from qualified retirement plans — 401(k)s, traditional and Roth IRAs, pensions
- Social Security benefits
- Interest on municipal bonds (already tax-exempt for regular income tax purposes, and excluded from NIIT too)
- Income from a business you materially participate in (active involvement, not passive ownership)
💡 This is a meaningful planning distinction: a landlord who materially participates in managing their properties may avoid NIIT on that rental income entirely, while a passive investor in the same type of property does not. The material-participation tests are the same ones used for the passive-activity-loss rules elsewhere in the code.
Where This Shows Up Most Often
NIIT tends to surprise people in a few specific, recurring situations: a large one-time capital gain (selling a business, a highly appreciated stock position, or investment real estate) that pushes MAGI over the threshold for just that year; retirees with substantial investment portfolios whose Required Minimum Distributions push MAGI up even though the RMDs themselves aren't subject to NIIT; and high-earning W-2 employees whose wages alone don't trigger it, but combined with a taxable brokerage account's dividends and gains, do.
How It Stacks With the Capital Gains Rate
NIIT is genuinely additive — it doesn't replace or interact with your regular capital gains rate, it sits on top of it. A high earner in the 20% long-term capital gains bracket who also owes NIIT is effectively paying 23.8% on the affected portion of their gains (20% + 3.8%), even before state taxes are added on top.
Planning Around NIIT
Because NIIT applies to the lesser of net investment income or MAGI-over-threshold, there are a few legitimate ways people manage exposure to it: timing large capital gains across multiple years instead of realizing them all at once (spreading a business sale or concentrated stock position across tax years to keep MAGI closer to the threshold each year); tax-loss harvesting to offset gains within the same year; shifting toward municipal bond interest, which is excluded from both regular income tax and NIIT; and timing Roth IRA conversions carefully, since the conversion itself is excluded from NIIT (retirement account income isn't investment income for this purpose) but it does raise MAGI, which can pull other investment income over the threshold in that same year.
A Worked Example
A married couple filing jointly has $230,000 in wages and $40,000 in net investment income (dividends and long-term capital gains combined), for a MAGI of $270,000. That's $20,000 over their $250,000 threshold. Their net investment income ($40,000) is larger than the excess-over-threshold amount ($20,000), so NIIT applies to the smaller figure: $20,000. At 3.8%, that's $760 in NIIT — on top of whatever capital gains tax and regular income tax they already owe on that same income.
Common Questions
Does NIIT apply to gains inside a 401(k) or IRA? No. Income and gains that stay inside a tax-advantaged retirement account aren't subject to NIIT while they remain there. Distributions from these accounts also aren't treated as investment income for NIIT purposes, even though they're taxable as ordinary income.
Is rental income always investment income for NIIT? Not always — if you qualify as a real estate professional under the material participation rules and materially participate in the rental activity, that rental income can be excluded from NIIT. For most landlords with a day job who don't meet the real-estate-professional threshold, rental income does count.
Does selling my primary home trigger NIIT? Only on the portion of gain that's taxable in the first place — if the home-sale exclusion covers your entire gain, there's nothing left for NIIT to apply to.
💡 This calculator doesn't model NIIT directly yet — see our Methodology page for the complete list of what's included and excluded. Use the Capital Gains preset to get your baseline long-term capital gains tax figured out, then add 3.8% by hand on whichever portion of your investment income falls above your MAGI threshold.