Net Investment Income Tax (NIIT): The 3.8% Surtax in 2026
Who owes the 3.8% Net Investment Income Tax in 2026? See the MAGI thresholds, what counts as investment income, the lesser-of calculation, and Form 8960.
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This article is for educational purposes only and is not tax, legal, or financial advice. Tax rules change periodically, always check current IRS guidance or consult a qualified tax professional.
Sold stock, a rental, or a business this year? You may owe a tax you have never heard of. The Net Investment Income Tax, or NIIT, is a 3.8% surtax that lands on investment income once your income crosses a fixed line. It is not withheld from a paycheck, and it is not new, but plenty of people meet it for the first time only when they file.
So let’s walk through who owes it in 2026, how the calculation actually works, and where it shows up on your return.
What Is the Net Investment Income Tax (NIIT)?
The NIIT is a 3.8% tax under Section 1411 of the Internal Revenue Code. Congress enacted it in 2013 as part of the Affordable Care Act, and the rate has not changed since. It applies to individuals, estates, and trusts.
The key word is “surtax.” NIIT does not replace your regular income tax or your capital gains tax. It stacks on top. A long-term capital gain taxed at 15% or 20% can carry an extra 3.8% for higher earners, pushing the real rate to 18.8% or 23.8%.
You only owe it if two things are true: you have net investment income, and your modified adjusted gross income (MAGI) is above the threshold for your filing status. Miss either condition and you owe nothing.
2026 NIIT Income Thresholds by Filing Status
The thresholds are set in the statute, not adjusted each year. Here is where the line sits in 2026.
| Filing Status | MAGI Threshold |
|---|---|
| Single | $200,000 |
| Head of Household | $200,000 |
| Married Filing Jointly | $250,000 |
| Qualifying Surviving Spouse | $250,000 |
| Married Filing Separately | $125,000 |
Estates and trusts hit NIIT far sooner. For 2026, undistributed net investment income becomes taxable once the entity’s AGI exceeds roughly $16,000, the start of the top trust tax bracket. That low ceiling is one reason trusts often distribute income to beneficiaries.
Notice these are the same thresholds as the 0.9% Additional Medicare Tax. A single high earner with both wages and investment income can get hit by both surtaxes in the same year, for the same reason: crossing the same dollar line.
The thresholds never move
This is the part most articles bury. These figures have been frozen at $200,000, $250,000, and $125,000 since 2013. They are not indexed for inflation.
Every other major tax number moves. The standard deduction rises, brackets widen, and contribution limits climb. The NIIT thresholds stand still. As wages and portfolios grow, the fixed line quietly pulls in more middle-upper earners each year, a slow-motion version of bracket creep. A household that was comfortably under $250,000 a decade ago may be over it today without feeling any richer.
The One Big Beautiful Bill Act (P.L. 119-21) reshaped 2026 brackets, the standard deduction, and the SALT cap. It left the NIIT rate and thresholds untouched. If you searched “2026” expecting everything to have changed, this is the exception worth knowing.
What Counts as Net Investment Income (and What Doesn’t)
Not all income is investment income. The distinction decides whether the surtax touches you at all.
Included in net investment income:
- Interest and dividends
- Capital gains from selling stocks, bonds, and mutual funds
- Rental and royalty income
- Non-qualified annuity distributions
- Passive business income and income from trading financial instruments
- Capital gain on the sale of investment property
Excluded from net investment income:
- Wages and salary
- Self-employment income
- Income from an active trade or business you materially participate in
- Social Security benefits
- Unemployment compensation
- Distributions from IRAs, 401(k)s, and other qualified retirement plans
- Tax-exempt municipal bond interest
- Gain on the sale of a principal residence covered by the Section 121 exclusion
The word “net” matters. You reduce gross investment income by related expenses, such as investment interest, advisory fees, and rental costs, before applying the tax.
Two exclusions catch people off guard. First, retirement plan distributions are not investment income, even though the underlying money grew through investing. Second, wages and self-employment income are not investment income, but they still raise your MAGI. High wages can push you over the threshold and expose your dividends and gains to the tax, even though the wages themselves are never taxed by NIIT.
The home-sale trap
Selling your house can trigger NIIT, but only past a point. The Section 121 exclusion shields up to $250,000 of gain for single filers and $500,000 for married filing jointly. Gain inside that limit is not net investment income.
Only the excess counts. If a married couple sees a $650,000 gain on their primary home, $500,000 is excluded and the remaining $150,000 is potential net investment income. Vacation homes and rentals get no Section 121 shield, so their full gain is in play.
How to Calculate NIIT: The “Lesser Of” Rule
This is where two people with identical investment income can owe wildly different amounts. NIIT is 3.8% of the smaller of two numbers:
- Your net investment income, or
- The amount your MAGI exceeds your threshold
For most filers, MAGI is simply your adjusted gross income. If you claim the foreign earned income exclusion, you add that excluded amount back to get MAGI for NIIT purposes. That add-back is the main difference between NIIT MAGI and plain AGI.
Because the tax uses the lesser of the two figures, the result hinges on how far over the line you are, not just how much investment income you have. Work two examples to see it.
Example 1: Large investment income, barely over the line
A single filer has $205,000 in MAGI, of which $150,000 is long-term capital gains from selling a stock position.
- Net investment income: $150,000
- MAGI over threshold: $205,000 minus $200,000 = $5,000
- Lesser of the two: $5,000
- NIIT: 3.8% of $5,000 = $190
Despite $150,000 in gains, only $5,000 is exposed, because MAGI barely cleared the threshold.
Example 2: Same gain, much higher income
A married couple filing jointly has $500,000 in MAGI, including the same $150,000 in capital gains.
- Net investment income: $150,000
- MAGI over threshold: $500,000 minus $250,000 = $250,000
- Lesser of the two: $150,000
- NIIT: 3.8% of $150,000 = $5,700
Same investment gain, thirty times the tax. The couple is so far over the threshold that their entire net investment income is exposed. The lesser-of test is what separates the two outcomes.
If you want to see how a stock sale or rental gain moves your whole return, Tax47 builds a full 1040 from real 1099-INT, 1099-DIV, 1099-B, Schedule E, and K-1 data and updates the estimated result as you add each form. NIIT is a return-level result there, not a standalone number, so you can watch investment income push your MAGI toward the line.
Reporting NIIT: Form 8960 and Your Return
You calculate and report NIIT on Form 8960. The form has three parts: investment income, allowable deductions against that income, and the MAGI computation that applies the lesser-of test.
For individuals, the Form 8960 total flows to your Form 1040 as an additional tax. Estates and trusts run the same calculation and carry it to Form 1041.
One thing to plan for: NIIT is not withheld. There is no employer taking 3.8% out of your dividends the way Social Security comes out of a paycheck. A big investment year, a large stock sale, a business exit, an inherited portfolio, can create a surtax bill you never had money set aside for. If it is large enough and you did not make estimated payments, you can face an underpayment penalty on top of the tax. When you know a taxable event is coming, adjust your quarterly estimates or withholding ahead of time.
How to Reduce or Avoid the 3.8% NIIT in 2026
You cannot change the rate or the thresholds, but you can influence both inputs: your MAGI and your net investment income. A few common approaches:
- Keep MAGI below the threshold. If you are close, deferring income or accelerating deductions to stay under $200,000 or $250,000 can wipe out the tax entirely for the year.
- Harvest investment losses. Realized losses offset realized gains, shrinking net investment income dollar for dollar.
- Spread capital gains across years. Selling a large position in installments, or across two tax years, can keep each year’s income lower and reduce how much falls inside the lesser-of test.
- Max out pre-tax retirement contributions. Contributions to a traditional 401(k), IRA, or HSA lower your AGI, which lowers your MAGI.
- Hold municipal bonds. Tax-exempt muni interest is excluded from net investment income and does not raise MAGI for this purpose.
- Time Roth conversions carefully. A conversion is not itself net investment income, but the extra income raises MAGI, which can expose your other investment income to NIIT. Convert in lower-income years.
- Donate appreciated securities. Giving stock directly to charity avoids realizing the gain, keeping it out of net investment income.
- Check real estate professional status. If you materially participate in your rentals and meet the more-than-750-hours and more-than-half-of-personal-services tests, that rental income can be treated as non-passive and excluded from NIIT.
These strategies interact, and the right mix depends on your full picture. Because NIIT shares its thresholds with the Additional Medicare Tax and rides on the same 2026 brackets shaped by the One Big Beautiful Bill, it pays to read the 2026 federal tax brackets alongside this. A move that lowers MAGI often helps in more than one place.
Sources & References
- IRS Topic No. 559, Net Investment Income Tax: Official IRS overview of the 3.8% surtax, thresholds, and covered income.
- IRS Questions and Answers on the Net Investment Income Tax: IRS guidance on the lesser-of calculation, MAGI, and exceptions.
- IRS Instructions for Form 8960 (PDF): Line-by-line instructions for reporting NIIT.
- Congressional Research Service, The 3.8% Net Investment Income Tax (IF11820): Policy background, including the fixed, non-indexed thresholds.
This article is for educational purposes only and is not tax, legal, or financial advice. Tax rules change periodically, always check current IRS guidance or consult a qualified tax professional.
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Frequently Asked Questions
What is the Net Investment Income Tax (NIIT) rate for 2026?
The NIIT rate is 3.8% for 2026, unchanged from prior years. It applies to individuals, estates, and trusts, and it sits on top of your regular income tax and capital gains tax, not instead of them.
What are the NIIT income thresholds for 2026?
The 2026 MAGI thresholds are $200,000 for single and head of household filers, $250,000 for married filing jointly and qualifying surviving spouse, and $125,000 for married filing separately. Estates and trusts are subject to NIIT once undistributed net investment income pushes AGI above roughly $16,000.
Are the NIIT thresholds indexed for inflation?
No. The NIIT thresholds have been fixed since the tax took effect in 2013 and are not adjusted for inflation, so more taxpayers cross them every year as incomes rise.
What income is subject to the 3.8% NIIT?
Net investment income includes interest, dividends, capital gains, rental and royalty income, non-qualified annuities, and passive business income. Wages, self-employment income, Social Security, and retirement account distributions are not net investment income, though they can raise your MAGI.
Does NIIT apply to the sale of my house?
Only the portion of your home-sale gain above the Section 121 exclusion counts as net investment income. The exclusion is $250,000 for single filers and $500,000 for married filing jointly, and gain within that limit is not subject to NIIT.
How do I calculate how much NIIT I owe?
NIIT equals 3.8% of the smaller of your net investment income or the amount your MAGI exceeds your filing threshold. You report it on Form 8960, which flows to your Form 1040.
Do wages or self-employment income count toward NIIT?
No. Wages and self-employment income are excluded from net investment income. They still raise your MAGI, though, which can push you over the threshold and expose your investment income to the tax.
How can I reduce or avoid the NIIT?
Common approaches include keeping MAGI below the threshold, harvesting investment losses, spreading capital gains across tax years, maxing pre-tax retirement contributions, holding municipal bonds, and timing Roth conversions carefully.