Net Investment Income Tax
The Net Investment Income Tax (NIIT) is a 3.8% surtax on investment income — interest, dividends, capital gains, rental income, and passive business income — that applies to taxpayers with modified AGI above $200,000 (single) or $250,000 (married filing jointly). It was enacted as part of the Affordable Care Act in 2010 to help fund Medicare. The NIIT stacks on top of regular capital gains rates: a married couple in the 20% capital gains bracket with MAGI above $250,000 effectively pays 23.8% on long-term capital gains. The NIIT does not apply to wages, Social Security, pension income, or distributions from IRAs and 401(k)s — only to investment income. For investors and real estate owners above the income thresholds, the NIIT is a meaningful consideration in timing capital gains realizations, choosing between Roth and traditional contributions, and structuring rental activities as active vs. passive. The threshold is not indexed for inflation — it has stayed at $200,000/$250,000 since 2013, meaning more taxpayers are captured each year as incomes rise.
The NIIT is a 3.8% surtax on net investment income for taxpayers with modified AGI above specified thresholds.
| Parameter | 2026 Value |
|---|---|
| Tax rate | 3.8% |
| Threshold (Single) | $200,000 MAGI |
| Threshold (MFJ) | $250,000 MAGI |
| Threshold (MFS) | $125,000 MAGI |
| Threshold (HOH) | $200,000 MAGI |
Legal Authority
- 26 U.S.C. § 1411 — Imposition of tax on net investment income
How It Works
The NIIT applies to net investment income — a defined category under IRC § 1411 that includes interest, dividends, capital gains, rental and royalty income, passive business income, and non-qualified annuity distributions. What it does not include is equally important: wages, self-employment income, Social Security benefits, tax-exempt interest, and distributions from qualified retirement plans (IRAs, 401(k)s, pensions) are all excluded. That last exclusion matters for retirees — IRA withdrawals don't trigger NIIT directly, but they do increase your MAGI and can push your investment income over the threshold.
The tax base is the lesser of your net investment income or the amount by which your MAGI exceeds the applicable threshold. A single filer with $220,000 MAGI and $50,000 in investment income pays 3.8% on only $20,000 — the amount above the $200,000 threshold — not the full $50,000. Once MAGI exceeds the threshold by more than the total investment income, the entire investment income amount is taxed. The $200,000/$250,000 thresholds have been unchanged since 2013 and are not indexed for inflation — roughly 40% cumulative inflation since enactment means significantly more investors cross the threshold each year without any legislative change.
Rental income is generally included in NIIT unless you qualify as a real estate professional under IRC § 469: you must spend more than 750 hours per year in real estate activities and more than 50% of your total working hours in real estate. Investors who qualify and materially participate in rental activities can potentially exclude that rental income from NIIT. For S-corporation owners, income from businesses in which you materially participate is also excluded — a structural advantage over passive investment structures. Adding 3.8% to capital gains rates, the NIIT brings the combined federal long-term capital gains rate to 18.8% (15% bracket) or 23.8% (20% bracket) for taxpayers above the thresholds, making MAGI management and tax-loss harvesting decisions meaningfully more consequential for affected investors.
How It Affects You
If you have significant capital gains or investment income above the threshold: The NIIT applies to the lesser of your net investment income or your MAGI above the threshold. This nuance matters. If you're a single filer with $220,000 MAGI and $50,000 in long-term capital gains, the NIIT applies to $20,000 (the $20,000 above the $200,000 threshold) — not the full $50,000 of gains. At the very top ($250,000+ MAGI with $50,000 gains), the NIIT applies to the full $50,000 — adding $1,900 to your bill at 3.8%. For taxpayers in the top capital gains bracket (20%), NIIT brings the combined federal long-term capital gains rate to 23.8%. State capital gains taxes are on top of this.
If your MAGI is near the threshold: Managing MAGI to stay below $200,000 (single) or $250,000 (MFJ) can eliminate NIIT entirely in a given year. Tools that reduce MAGI include: traditional (pre-tax) retirement contributions, Health Savings Account contributions (if eligible), above-the-line deductions (self-employed health insurance, student loan interest), and Qualified Charitable Distributions from IRAs (for those 70.5+, which reduce AGI without requiring itemization). Timing capital gains realizations, tax-loss harvesting (wash sale rules apply), and deferring Roth conversions to years with lower income can all help. The NIIT on $10,000 of investment income is $380 — small in isolation, but these decisions compound over years.
If you're a retiree drawing down retirement accounts: IRA and 401(k) distributions are NOT subject to NIIT — they're ordinary income, not investment income. However, they do increase your MAGI, which can push your investment income above the threshold and trigger NIIT on interest, dividends, and capital gains you already have. A retiree with $180,000 in qualified dividends and capital gains might be below the NIIT threshold without IRA distributions. Add a $30,000 IRA withdrawal, and $10,000 of that investment income is now subject to 3.8% NIIT — costing $380. This interaction means withdrawal sequencing matters: understand how each IRA distribution affects your MAGI before withdrawing, and consider whether Roth conversions in lower-income years reduce future forced RMD withdrawals that drive MAGI above the NIIT threshold.
If you own rental property or an S-corporation: Rental income is generally included in NIIT — unless you qualify as a real estate professional under IRC § 469 (more than 750 hours per year in real estate activities AND more than 50% of your working hours in real estate). If you qualify, you can materially participate in your rental activities and potentially exclude rental income from NIIT. IRS audit activity targeting real estate professional status has increased — document your hours with a contemporaneous written log maintained throughout the year (not reconstructed at tax time). For S-corporation owners, income from businesses in which you materially participate is NOT subject to NIIT. This is a structural advantage of S-corps over passive investments, but proposed legislation (not yet enacted) would change this for certain high-income owners.
State Variations
NIIT is federal only. States do not impose a parallel investment income surtax (though state income tax applies to investment income at normal rates).
Implementing Regulations
- 26 CFR Part 1 — Income tax regulations (SS 1.1411: definition of net investment income, 3.8% surtax computation)
- 26 CFR Part 53 — Foundation excise taxes (net investment income definitions for private foundations)
- 26 CFR 1.1411-1 — General rules (3.8% NIIT framework: applicable taxpayers, threshold amounts, net investment income definition)
- 26 CFR 1.1411-2 — Application to individuals (computation of NIIT for individuals; modified adjusted gross income; threshold amounts of $200K single / $250K MFJ — not indexed for inflation)
- 26 CFR 1.1411-10 — Controlled foreign corporations and PFICs (NIIT treatment of CFC and PFIC income)
Pending Legislation
- Rate increases: Proposals to increase the NIIT to 5% or apply it to a broader base.
- Application to active S-corp income: Proposals to apply NIIT to all S-corp/partnership income regardless of participation.
- Threshold indexing: Proposals to index the thresholds to inflation.
- Medicare trust fund: Proposals to redirect NIIT revenue to Medicare (currently goes to general revenue).
Recent Developments
- NIIT expansion proposals in 2025 reconciliation: House Democrats proposed extending the NIIT to cover active S-corp and partnership income — not just passive investment income — as a revenue offset in early 2025 reconciliation discussions. The Republican-controlled 119th Congress did not include these provisions in its tax package. The proposal has established legislative precedent, however, and a future Congress with different composition could revive it. S-corp owners who currently escape both SE tax and NIIT on active business income should flag this as a live policy risk.
- Thresholds frozen since 2013 — bracket creep is real: The $200,000/$250,000 MAGI thresholds were set when the ACA was enacted in 2013 and have not been adjusted for inflation. Over 13 years (roughly 40% cumulative inflation), the equivalent threshold in 2026 dollars would be approximately $280,000/$350,000. More investors, more retirees with investment portfolios, and more real estate owners are crossing the threshold each year without any legislative action.
- Combined top LTCG + NIIT rate remains 23.8% in 2026: For high-income taxpayers in the top long-term capital gains bracket, NIIT continues to bring the combined federal rate to 23.8% (20% + 3.8%). Proposals to raise capital-gains rates or broaden the NIIT base have not been enacted as of April 6, 2026.
- IRS scrutiny of real estate professional status: IRS audit activity targeting taxpayers claiming real estate professional status — which can exclude rental income from NIIT — has increased. The exception requires strict compliance with the material participation and 750-hour tests under IRC § 469. Document your hours annually with a contemporaneous log, not a reconstruction at tax time.