What is net investment income tax (NIIT)?

Many investors are familiar with regular income tax and capital gains tax, but if your modified adjusted gross income (MAGI) goes above a certain point, you could owe an additional net investment income tax (NIIT). Understanding how it works could help you determine whether it applies to you—and if it does, how to potentially reduce or avoid it.

What is net investment income tax (NIIT)?

Net investment income tax is the 3.8% additional tax some high earners and estates must pay on investment gains. That could translate to a hefty tax bill if you don’t strategize to minimize the burden. If NIIT sounds new to you, that could be because it’s only been around since 2013, when it was implemented to help fund health care policy changes.

How does net investment income tax (NIIT) work?

NIIT kicks in if your MAGI exceeds the annual threshold for your filing status. If your income is above the cutoff, the 3.8% tax applies to whichever is lower: your net investment income—the profits you made off your investments and certain other sources—or the difference between your MAGI and the threshold.

What counts as net investment income (NII)?

Most types of taxable investment income fall into this bucket.

• Net capital gains from selling assets for a profit
• Stock dividends
• Interest from bonds and other fixed-income investments
• Rental income
• Royalty income
• Nonqualified annuity income, which refers to income from annuities purchased with taxable dollars, such as through brokerage or checking accounts. Note that only the taxable portion may be subject to NIIT.
• Passive business income (from businesses you don’t actively participate in)
• Income from businesses involved in trading investments

What doesn’t count as net investment income (NII)?

Wages, bonuses, Social Security benefits, life insurance payouts, and unemployment benefits don’t count as net investment income (NII). The following types of investment income are generally excluded from NIIT as well:

• Qualified withdrawals from 401(k)s, IRAs, and other retirement accounts
• Tax-exempt interest, like interest from municipal bonds
• Excluded gains from selling a primary residence (up to $250,000 for single filers; $500,000 for married couples filing jointly)
• Income from a business you actively participate in

Who pays net investment income tax (NIIT)?

NIIT can apply to:

• Individuals earning more than the MAGI threshold
• Estates and trusts

Each group has its own income thresholds that determine whether the tax applies.

NIIT for individuals

Whether you’ll pay this tax depends on your filing status and your MAGI. For the 2025 and 2026 tax years, individuals owe NIIT if they received net investment income and their MAGI exceeds the following levels:

• Single or head of household: $200,000
• Married filing jointly or qualified surviving spouse: $250,000
• Married filing separately: $125,000

NIIT for estates and trusts

Estates and trust funds holding investments on behalf of others could also owe NIIT. Though some, such as charitable trusts and grantor trusts, are exempt, estates and trusts are subject to NIIT if:

• The adjusted gross income (AGI) exceeds $15,650 in 2025 or $16,000 in 2026 and
• there’s undistributed net investment income.

The 3.8% NIIT would apply to either the undistributed net investment income or the amount by which the estate or trust’s AGI exceeds the annual limit—whichever is lower. You may be able to manage NIIT by distributing investment income to beneficiaries who may not themselves be subject to the tax.

Read more: 5 hidden taxes

Examples of net investment income tax (NIIT)

Let’s look at 2 different examples of individuals owing NIIT:

• Steve has net investment income of $100,000, and his MAGI exceeds the NIIT limit for his filing status by $50,000. Because his excess MAGI is lower than his NII, he would owe 3.8% on $50,000. That works out to $1,900.
• Alison also has net investment income of $100,000, but her MAGI exceeds the annual limit for her filing status by $150,000. In this case, NIIT would apply to her net investment income since this is lower than the difference between the MAGI limit and her MAGI. She would owe 3.8% on $100,000, totaling $3,800.

How to calculate how much NIIT you may owe

Follow these steps to estimate your NIIT bill:

Ways to help reduce NIIT

There are 2 main strategies for potentially reducing how much you owe in net investment income tax: Reduce your MAGI or lower your net investment income.

To lower your MAGI

• Increase deductible contributions to retirement plans: Making additional contributions to a traditional 401(k) could reduce your taxable income for the year—while also putting more savings aside for the future.
• Fund an HSA: If you’re enrolled in an eligible high-deductible health plan, you could make pre-tax or tax-deductible contributions to a health savings account (HSA).
• Defer income: Expecting a bonus? You could ask your employer to push it back until the following January to keep your current tax-year MAGI on the lower side. This could make sense if you have unusually high net investment income one year.
• Donate to qualified charitable organizations: If you’re retired and don’t need the money from your required minimum distributions (RMDs), which are taxable, you could make a qualified charitable distribution (QCD) directly from an IRA to an eligible organization. Even if you’re not retired, donating to qualified charitable organizations could reduce your MAGI if you meet certain criteria detailed in these tax law changes.
• Donate stock to charity: Subject to certain percentage limitations, you may be able to deduct the full fair market value of your investment if you itemize your deductions.

To reduce your investment income

• Harvest capital losses: Check whether you hold any investments that dropped in value. If so, you might use tax-loss harvesting to sell them for a deductible capital loss. That could offset your gains, reducing your taxable investment income.
• Make more tax-efficient investments: For example, you could buy municipal bonds with tax-free interest rather than corporate and federal bonds with taxable interest. If it matches your investing goals and risk tolerance, another option is to consider investing more in growth stocks rather than dividend-paying stocks. Growth stocks generally don’t pay dividends because they tend to invest profits back into the business.
• Participate more in your business: If you earn passive income from a business, consider increasing your involvement to more than 500 hours a year. That way, the income may no longer be considered passive and therefore wouldn’t be subject to NIIT.
• Use alternative sales methods for property: If you plan on selling real estate, consider making it an installment sale. This allows you to spread your payout and taxes over multiple years, potentially keeping you below the NIIT thresholds. If you have your sights set on another property, you could also consider a 1031 exchange. This lets you defer capital gains taxes if you reinvest the investment property sale proceeds in another investment property. This is a highly complex strategy, so seek help from a real estate or tax attorney.

How to report net investment income on your taxes

Here are the steps to take to report net investment income if you owe NIIT. Note: If you don’t owe NIIT, you generally don’t need to report NII on your tax return.

1. Using Form 8960, tally up all your taxable investment income.
2. Subtract deductible expenses.
3. Determine which is smaller: your NII or the difference between your MAGI and the NIIT threshold.
4. Enter the smaller number on line 20.
5. Multiply that amount by 0.038 to determine your NIIT burden.
6. Report this amount on line 12 of Schedule 2 of your 1040 Individual Tax Return.
7. Attach Form 8960 and file your tax return.

If you use tax software or work with an accountant, they can handle the reporting for you. Consult a tax professional about your specific situation.