The net investment income tax (NIIT) is an additional 3.8% federal tax on certain investment income for people whose income is above set levels. It applies on top of regular income tax and the capital gains rates, and it is separate from the Additional Medicare Tax on wages. Because the thresholds are fixed dollar amounts, more households cross them each year. This guide explains who pays, what is covered, and how it is calculated.
How the tax is figured
You pay 3.8% of the lesser of:
- your net investment income (NII), or
- the amount by which your modified adjusted gross income (MAGI) is above your threshold.
For most people MAGI is the same as adjusted gross income. It is higher only if you exclude foreign earned income. Because the tax uses the lesser of the two numbers, someone with a large income and small investment income pays NIIT only on the investment income, and someone with a high investment income but total income near the threshold pays only on the excess.
Example 1: A married couple filing jointly has $230,000 of wages and $40,000 of NII (interest, dividends and a capital gain), for MAGI of $270,000. MAGI is $20,000 over the $250,000 threshold. The smaller of $40,000 and $20,000 is $20,000, so NIIT is 3.8% x $20,000 = $760.
Example 2: A single filer with MAGI of $300,000 includes a $150,000 gain from selling a rental property. MAGI exceeds $200,000 by $100,000. The smaller of $150,000 and $100,000 is $100,000, so NIIT is $3,800.
What counts as net investment income
NII generally includes:
- Interest, dividends, annuities, royalties and rents, unless they come from a trade or business that is not passive and is not a business of trading in financial instruments or commodities.
- Income from a business that is a passive activity for you, or a business of trading in financial instruments or commodities.
- Net gain from selling property such as stocks, bonds, mutual funds and real estate, to the extent it is in taxable income. This includes digital assets, so see cryptocurrency taxes.
- Income from certain foreign investments, such as passive foreign investment companies. If you invest in Indian mutual funds, see PFIC rules.
NII is reduced by deductions properly allocable to it, such as investment interest expense and certain state and local taxes.
What is excluded
Wages, unemployment compensation, Social Security benefits, alimony, tax-exempt bond interest, income subject to self-employment tax, and distributions from qualified retirement plans such as 401(k)s and IRAs are not NII. Gain on a principal residence that you exclude under the home sale rules is also not NII, though gain above the exclusion can be. See home sale exclusion. Distributions from retirement accounts can still raise MAGI, which affects the threshold test.
Rental income
Net rental income is generally NII unless the rental is a trade or business that is not passive for you, such as when you qualify as a real estate professional and materially participate. Gain on selling rental property is also generally NII. See rental property taxes.
Who the tax applies to
NIIT applies to U.S. citizens and resident aliens. It does not apply to nonresident aliens. A U.S. citizen or resident who is married to a nonresident alien generally uses married filing separately thresholds, unless the couple elects to file jointly. Dual-status filers are subject to NIIT only for the part of the year they were U.S. residents, and the threshold is not prorated. Estates and trusts are also subject to NIIT with a much lower threshold. For 2025 it is $15,650. See residency rules for resident, nonresident and dual-status filers.
Reporting and paying
You calculate NIIT on Form 8960 and attach it to Form 1040. The tax is added to your total tax through Schedule 2. Because no withholding is taken for NIIT specifically, you may need to adjust your Form W-4 or make estimated tax payments. Planning ideas sometimes include timing the sale of a property or investment, offsetting gains with losses, using tax-exempt bonds, or retirement plan contributions that lower MAGI. Whether any of these helps depends on your full return.
State considerations
NIIT is a federal tax with no state counterpart in Illinois. Illinois taxes investment income at its flat rate of 4.95%. See our Illinois guide.
How we can help
We project NIIT before a large sale, prepare Form 8960, and coordinate it with the capital gains rate and the Additional Medicare Tax. See tax planning and individual tax preparation, or contact us.
Frequently asked questions
Does NIIT apply to my 401(k) or IRA withdrawals?
No. Qualified retirement plan distributions are not NII, but they can increase your MAGI.
Is the tax the same as the Additional Medicare Tax?
No. The Additional Medicare Tax is 0.9% on wages and self-employment income above separate thresholds. NIIT is 3.8% on investment income. A taxpayer can owe both.
Does NIIT apply when I sell my home?
Only to gain that is not excluded. If your gain is within the $250,000 or $500,000 exclusion, it is not subject to NIIT.
Are the thresholds indexed?
No. The thresholds are fixed in the law at $200,000, $250,000 and $125,000.
Official sources
- IRS: Topic no. 559, Net investment income tax
- IRS: Instructions for Form 8960 (2025)
- IRS: Net Investment Income Tax
This page is a plain-language summary. The official source controls if there is any difference.
General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.