What the Net Investment Income Tax is

The Net Investment Income Tax (NIIT) is a 3.8% tax on certain investment earnings. It applies only to higher-income individuals and married couples filing jointly, and it funds the Affordable Care Act. You do not owe it on wages, salary, or self-employment income — only on money your investments generate.

The tax applies to the lesser of two amounts: your net investment income for the year, or the amount your modified adjusted gross income (MAGI) exceeds the threshold. For 2024, those thresholds are $200,000 for single filers and $250,000 for married couples filing jointly. The thresholds do not change year to year for inflation.

Net investment income includes capital gains, dividends, interest, rental income, and income from passive business activities. It does not include distributions from retirement accounts like 401(k)s or IRAs, though the earnings inside those accounts are not subject to NIIT while they grow.

Key Takeaways

  • The Net Investment Income Tax is 3.8% and applies only to investment earnings above $200,000 (single) or $250,000 (married filing jointly) in modified adjusted gross income.
  • Net investment income includes capital gains, dividends, interest, and rental income, but not wages or retirement account withdrawals.
  • You calculate NIIT on your tax return using Form 8960, and your tax software or preparer will handle the calculation if you owe it.
  • The tax applies to the lesser of your net investment income or the amount your MAGI exceeds the threshold, so you may owe tax on only part of your investment earnings.
  • Certain types of income, like gains from selling your primary residence (up to the exclusion limit) and tax-exempt bond interest, do not count toward NIIT.

Who owes the Net Investment Income Tax

You owe NIIT only if your modified adjusted gross income exceeds the threshold for your filing status. For 2024, that means single filers with MAGI over $200,000 and married couples filing jointly with MAGI over $250,000. Married couples filing separately have a threshold of $125,000.

Even if your MAGI is above the threshold, you owe tax only on the lesser of your net investment income or the excess over the threshold. For example, if you are single with $220,000 in MAGI and $8,000 in net investment income, you owe NIIT on only $8,000 (the lesser amount), not on the full $20,000 excess over the threshold.

The thresholds have remained the same since the tax began in 2013. They do not adjust for inflation, so more people cross into NIIT territory each year as incomes rise.

What counts as net investment income

Net investment income includes capital gains (profit from selling stocks, real estate, or other assets), dividends, interest from savings accounts and bonds, and rental income. It also includes income from passive business activities — businesses where you do not materially participate in the day-to-day work.

Some types of income are excluded. Gains from selling your primary residence are not counted, up to the $250,000 exclusion for single filers (or $500,000 for married couples). Interest on municipal bonds is also excluded. Distributions from retirement accounts like 401(k)s and traditional IRAs do not count as net investment income, though the earnings inside those accounts are not subject to NIIT while they remain in the account.

Self-employment income and wages are never part of net investment income, even if you have a side business or multiple jobs. The tax is designed to apply only to passive investment returns, not to income you earn through work.

How to calculate what you owe

You report NIIT on Form 8960, which you attach to your Form 1040 tax return. The form walks you through calculating your net investment income and comparing it to your MAGI threshold. If you use tax software or work with a tax preparer, they will complete this form for you if you owe the tax.

The calculation has several steps. First, you add up all your net investment income from the year — capital gains, dividends, interest, rental income, and passive business income. Then you determine your modified adjusted gross income (MAGI), which is usually your adjusted gross income with certain deductions added back. Finally, you calculate the excess of MAGI over the threshold and compare it to your net investment income. You owe NIIT on whichever is smaller.

If you have investment losses in a year, they reduce your net investment income dollar-for-dollar. A year with significant losses may bring your net investment income below the threshold, even if your MAGI is well above it.

When you pay and how it affects your taxes

NIIT is reported and paid when you file your annual tax return. You do not make quarterly estimated payments for NIIT separately — it is calculated as part of your total tax liability on Form 1040. If you owe NIIT, it increases the total tax you owe for the year.

The tax is in addition to regular income tax on the same earnings. For example, if you have $10,000 in long-term capital gains and owe NIIT, you pay both the regular capital gains tax rate (0%, 15%, or 20% depending on your income) and the 3.8% NIIT on that same $10,000.

If you have a large investment gain in a single year that pushes you over the MAGI threshold, you may owe NIIT that year even if you do not usually owe it. Similarly, if you have a year with very high investment income, your NIIT bill can be substantial.

Planning strategies to reduce NIIT

Some people use tax-loss harvesting — selling investments at a loss to offset gains and reduce net investment income. This lowers your NIIT if the losses bring your net investment income below the threshold. However, the wash-sale rule prevents you from buying back the same or substantially identical security within 30 days, so you must replace it with a different investment.

Timing the sale of assets can also matter. If you are close to the threshold, deferring a large gain to the next year might keep you below the threshold in the current year. Conversely, if you know you will be above the threshold anyway, you might accelerate gains into the current year to bunch them together.

Maximizing contributions to retirement accounts like 401(k)s and IRAs reduces your adjusted gross income and may lower your MAGI below the threshold. These contributions do not reduce net investment income directly, but they do reduce the income that counts toward the MAGI threshold.

Frequently Asked Questions

Do I owe Net Investment Income Tax on my 401(k) or IRA withdrawals?

No. Withdrawals from retirement accounts are not net investment income. However, if the withdrawal pushes your modified adjusted gross income above the threshold, it can trigger NIIT on your other investment income. The withdrawal itself is not taxed under NIIT, but it may cause you to owe NIIT on capital gains or dividends you received that same year.

What if I sell my house and have a capital gain?

Gains from selling your primary residence are excluded from net investment income up to $250,000 (single) or $500,000 (married filing jointly). If your gain exceeds the exclusion, only the excess counts toward NIIT. Investment properties and second homes do not may have access to for this exclusion.

Can I avoid Net Investment Income Tax by not selling my investments?

Yes, as long as you hold the investments. NIIT applies to realized gains (when you sell), dividends, and interest — not to unrealized gains (the increase in value while you still own the asset). However, you still owe NIIT on dividends and interest each year, even if you do not sell anything.

Does Net Investment Income Tax apply to cryptocurrency gains?

Yes. Gains from selling cryptocurrency are capital gains and count as net investment income. If your MAGI exceeds the threshold and you have cryptocurrency gains, you owe NIIT on those gains just as you would on stock gains.

What is modified adjusted gross income, and how is it different from regular AGI?

Modified adjusted gross income (MAGI) for NIIT purposes is usually your regular adjusted gross income with certain deductions added back, such as the foreign earned income exclusion and the deduction for student loan interest. For most people, MAGI is the same as or very close to their regular AGI. Your tax software will calculate it for you on Form 8960.