The net investment income tax is a 3.8% federal surtax on investment income, owed on top of regular income tax and capital gains rates, by taxpayers whose modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly). Enacted as IRC Section 1411 and computed on Form 8960, it reaches investors, landlords, passive business owners, and successful self-employed people whose portfolios have grown alongside their businesses.
The lesser-of formula and what counts as investment income
The tax is 3.8% of the smaller of two numbers: your net investment income, or the amount by which your MAGI exceeds your threshold. Someone barely over the line pays the surtax on only the sliver above it, while someone far over the line pays it on their full investment income.
Net investment income includes interest, dividends (qualified dividends included), capital gains from stocks, funds, crypto and investment real estate, rental and royalty income, income from nonqualified annuities, and pass-through income from any business in which you are a passive owner. Allocable expenses such as investment interest reduce it. Just as important is what stays out: wages, self-employment income, income from a business in which you materially participate, distributions from 401(k)s, IRAs and other qualified retirement plans, Social Security, tax-exempt municipal interest, and home sale gain sheltered by the Section 121 exclusion (only gain above the $250,000 or $500,000 exclusion counts). For most filers, MAGI is simply AGI; the main add-back is the foreign earned income exclusion.
2026 figures
The thresholds for 2026 are $200,000 for single filers and heads of household, $250,000 for married filing jointly, and $125,000 for married filing separately. They have been fixed at those levels since the tax took effect in 2013 and are not indexed for inflation, so every year of wage and price growth pulls more taxpayers into the net. The 3.8% rate is likewise unchanged for 2026. Trusts and estates are hit far sooner: the surtax starts at the dollar level where the top trust income tax bracket begins, which was $15,650 for 2025, so undistributed investment income inside a non-grantor trust is exposed almost immediately.
For creators and the self-employed
Your business income itself is generally safe. Net profit on Schedule C and active S corporation income flowing through a K-1 are not net investment income, because self-employment earnings already carry their own Medicare taxes on Schedule SE: 2.9%, plus the 0.9% additional Medicare tax above the same $200,000 and $250,000 thresholds. Section 1411 is designed so each dollar faces one 3.8%-class surtax, not two.
That design creates the S corporation gap: an owner who materially participates pays no self-employment tax on the K-1 profit share and no NIIT on it either, since the income is active. That double escape is one of the strongest quantitative arguments in the S corporation analysis. The gap closes where participation ends: inherit or buy into a business you do not work in, and the same K-1 income becomes passive and picks up the 3.8%.
What is exposed is the portfolio the business built. Once brand deals, course sales and consulting fees push MAGI past the threshold, every dollar of brokerage dividends, interest and realized gains is surtaxed, and a strong business year exposes more of it. Rental income is passive by default, so a creator who buys rental property pays NIIT on the net rents unless she qualifies as a real estate professional and materially participates. On exit, gain from selling a business you materially participated in is generally exempt, while gain from a passive interest is not; the difference on a seven-figure sale is tens of thousands of dollars. Remember the plumbing: Form 8960 rides with the Form 1040, and quarterly Form 1040-ES payments must include the surtax, since nothing withholds it for you.
Mistakes that cost money
- Leaving NIIT out of estimated payments. A $500,000 gain from selling appreciated stock adds up to $19,000 of surtax; miss it in the vouchers and an underpayment penalty accrues on top.
- Assuming self-managed rentals are exempt. Answering tenant emails is not material participation for this purpose. Without real estate professional status, net rental income is passive and surtaxed.
- Stacking a Roth conversion on a big-gain year. The conversion itself is not investment income, but it inflates MAGI and drags investment income that was under the threshold into the 3.8% net. Converting in a low-income year avoids this.
- No participation records for K-1 interests. Material participation is measured by hours tests; without a contemporaneous log, an examiner can recast active income as passive and assess 3.8% across multiple years.
- Parking income in a trust. Undistributed investment income above the trust threshold (about $15,650 for 2025) is surtaxed at once, when distributing it to beneficiaries under their own $200,000 or $250,000 thresholds would have avoided the tax entirely.
Timing income around a fixed threshold
Because the thresholds never move, NIIT planning is mostly a timing exercise. Realizing a large gain across two Decembers instead of one can keep MAGI near the line both years and surtax only a fraction of the gain. Harvesting losses in the same year as gains shrinks net investment income directly. Deferral tools that reduce AGI, such as pension and solo 401(k) contributions, do double duty: retirement plan deductions lower MAGI even though the eventual distributions were never subject to NIIT anyway. For an owner approaching a business sale, the material participation facts in the years before closing determine whether the entire gain is exempt, which is worth establishing early, not in the diligence data room.
If your MAGI hovers near the threshold, a sale is coming, or passive K-1s are stacking up, have someone model the surtax before year-end; the levers only work while the calendar is still open.