Taxes and income
Net Investment Income Tax Explained
Reviewed by the Smart Finance Calculators Editorial TeamLast reviewed:
The Net Investment Income Tax (NIIT) is a separate 3.8% federal tax that can apply on top of the ordinary income-tax or capital-gains tax rates. It was introduced by the Affordable Care Act and generally applies to individuals whose modified adjusted gross income (MAGI) exceeds a threshold that depends on filing status.
Unlike the standard income-tax brackets, the NIIT is not graduated — it is a flat 3.8% calculated on Form 8960. Understanding when it applies, what it applies to, and how it interacts with capital-gains rates is important for investors with significant income from dividends, interest, or investment sales.
Key takeaways
- The NIIT is a 3.8% flat tax calculated on the lesser of net investment income or MAGI above the applicable threshold.
- Thresholds are $200,000 for single/HOH, $250,000 for MFJ/QSS, and $125,000 for MFS — and they are not indexed for inflation.
- Net investment income includes interest, dividends, capital gains, passive rents, and certain other investment income.
- The NIIT is separate from the 20% long-term capital-gains rate; both can apply simultaneously.
- A taxpayer with MAGI well above the threshold and a large capital gain could face a combined federal rate of 23.8% (20% + 3.8%).
Who owes the Net Investment Income Tax
The NIIT applies to individuals, estates, and certain trusts when MAGI exceeds the applicable threshold. For individuals, the 2026 thresholds are: $200,000 for single filers and head of household; $250,000 for married filing jointly or qualifying surviving spouse; $125,000 for married filing separately.
These thresholds are not adjusted for inflation and have not changed since the tax was introduced in 2013. As incomes rise over time, more taxpayers are affected each year without Congress changing any rates or brackets.
What counts as net investment income
Net investment income generally includes: interest (other than tax-exempt interest), dividends, capital gains from investment-asset sales, passive rental income, net income from passive business activities, and certain other investment-income categories.
It does not include wages, self-employment income (though passive income from a business in which the taxpayer does not materially participate may be included), active business income, distributions from IRAs and most qualified retirement plans, or Social Security benefits.
Properly allocable investment expenses reduce net investment income. Form 8960 provides detailed instructions for what qualifies.
Worked example: NIIT on a capital gain (2026)
Filing status: Married Filing Jointly. MAGI before the sale: $230,000. Net Investment Income before the sale: $5,000 (interest and dividends). Long-term capital gain from stock sale: $50,000.
MAGI after the sale: $280,000. NIIT threshold for MFJ: $250,000. MAGI above threshold: $30,000.
Net investment income after the sale: $5,000 + $50,000 = $55,000.
NIIT = 3.8% × lesser of ($55,000 or $30,000) = 3.8% × $30,000 = $1,140.
Without the capital gain, MAGI would have been $230,000 — below the $250,000 threshold — and no NIIT would have been owed. The capital gain pushed MAGI above the threshold and triggered the additional tax.
How the tax is calculated
The NIIT equals 3.8% of the lesser of: (1) net investment income for the year, or (2) MAGI above the applicable threshold.
Example: a single filer has MAGI of $240,000 (threshold $200,000) and net investment income of $35,000. The amount above the threshold is $40,000. The lesser of $35,000 and $40,000 is $35,000. NIIT = 3.8% × $35,000 = $1,330.
If the same filer had only $10,000 of net investment income, the NIIT would be 3.8% × $10,000 = $380, because $10,000 is less than $40,000.
How NIIT interacts with capital-gains rates
The NIIT is calculated separately from the regular capital-gains rates and is not part of the 0%/15%/20% rate structure. Both taxes can apply to the same capital gain in the same year.
A taxpayer in the 20% long-term capital-gains band whose MAGI exceeds the NIIT threshold may owe a combined federal rate of 23.8% on the affected portion of the gain (20% regular capital-gains rate + 3.8% NIIT).
Taxpayers in the 15% band with MAGI above the threshold face a combined rate of 18.8%. Taxpayers in the 0% band with MAGI above the threshold face a combined rate of 3.8%.
How to use the Capital Gains Tax Calculator
Use the Capital Gains Tax Calculator to estimate the Net Investment Income Tax on a capital gain from an investment sale. Enter your MAGI and other net investment income to see the incremental NIIT alongside the federal capital-gains rate estimate.
Open the Capital Gains Tax CalculatorCommon mistakes to avoid
- Assuming the NIIT replaces the 20% long-term capital-gains rate rather than adding to it.
- Forgetting that the NIIT thresholds are not inflation-adjusted, which means they affect more taxpayers each year as incomes rise.
- Including IRA and 401(k) distributions as net investment income — they are generally excluded.
- Omitting properly allocable investment expenses that can reduce net investment income on Form 8960.
- Assuming MAGI for NIIT purposes is the same as regular AGI — for most taxpayers it is the same, but certain foreign income and deductions can cause differences.
Practical takeaways
- The NIIT adds 3.8% to investment income when MAGI exceeds the threshold, on top of the regular capital-gains or ordinary-income tax.
- The 2026 thresholds ($200,000/$250,000/$125,000) have not changed since 2013 and are not inflation-indexed.
- Not all investment income is subject to NIIT — qualified retirement-plan distributions, Social Security benefits, and active business income are generally excluded.
- Form 8960 is used to calculate the NIIT and is filed with the regular federal return.
Frequently asked questions
No. They are separate taxes calculated differently. The 20% long-term capital-gains rate applies to gains through the regular income-tax system; the NIIT at 3.8% applies separately on Form 8960 to the lesser of net investment income or MAGI above the applicable threshold. Both can apply simultaneously, producing a combined federal rate of 23.8% on gains for taxpayers above both thresholds.
Generally no. Distributions from traditional IRAs, Roth IRAs, 401(k) plans, 403(b) plans, and similar qualified retirement plans are excluded from net investment income for NIIT purposes, even when they are taxable for regular income-tax purposes. However, these distributions may increase MAGI and push the taxpayer above the NIIT threshold on other investment income.
Yes. Both qualified and ordinary dividends are generally included in net investment income for NIIT purposes. Qualified dividends are already taxed at the preferential long-term capital-gains rates for regular tax; the NIIT adds another 3.8% on the portion that causes MAGI to exceed the threshold.
Yes. A taxpayer whose gain falls entirely within the 0% long-term capital-gains band still owes the 3.8% NIIT on the gain if MAGI exceeds the applicable threshold. For such a taxpayer, the total federal rate on the affected gain is 3.8%, not 0%.
The IRS provides detailed guidance on Form 8960 and its instructions, IRS Topic No. 559, and the IRS page specifically dedicated to the Net Investment Income Tax at irs.gov. The instructions for Form 8960 explain exactly which income is included and excluded and how to compute the tax. Because the rules can interact with other income in complex ways, a qualified tax professional can help with situations involving significant investment income.
Related calculators
Related guides
- How Capital Gains Tax Is CalculatedA plain-English guide to how the IRS taxes investment sales: adjusted basis, amount realized, holding-period rules, rate bands, and net proceeds.
- Short-Term vs. Long-Term Capital GainsUnderstand why holding an investment for more than one year can significantly reduce the federal tax on the sale — and how to count the holding period correctly.
- Marginal vs. Effective Tax RateYour marginal rate is not the percentage of your income you actually pay — here is the number that is.
- How Federal Income Tax Brackets WorkBeing "in the 22% bracket" does not mean you pay 22% on everything — here is how progressive tax really works.
Sources and methodology
This article is based on general financial principles and information published by the authoritative primary sources below. Figures are illustrative and rounded to explain the concepts.
- IRS Form 8960 and Instructions — Net Investment Income Tax
- IRS Net Investment Income Tax Guidance
- IRS Topic No. 409 — Capital Gains and Losses
- IRS Revenue Procedure 2025-32 — 2026 Inflation Adjustments
NIIT thresholds reflect the statutory amounts under IRC §1411 as in effect for tax year 2026. Last reviewed: August 3, 2026.
About this article
Written and reviewed by the Smart Finance Calculators Editorial Team.
Published · Last reviewed
Financial disclaimer: Results are estimates for educational purposes only and are not professional financial, tax, legal or investment advice. Figures may not reflect your exact situation. Consult a qualified professional before making financial decisions.