Net Investment Income Tax (NIIT) 2026: Do You Owe the Extra 3.8%?

Published September 11, 2026 · 9 min read

If you earn dividends, capital gains, or rental income — and your total income exceeds certain thresholds — you may owe an additional tax that many investors overlook: the Net Investment Income Tax (NIIT). It adds a flat 3.8% surcharge on top of your regular income tax, and it can cost thousands of dollars a year if you don’t plan for it.

The NIIT was created in 2013 as part of the Affordable Care Act and has remained unchanged since. Unlike most tax provisions, the income thresholds that trigger it are not indexed for inflation — meaning more taxpayers are pulled in each year as wages and investment accounts grow. Here is everything you need to know about whether you owe it, what counts, and how to legally reduce it.

What Is the Net Investment Income Tax?

The NIIT is a 3.8% tax imposed by Section 1411 of the Internal Revenue Code on the lesser of:

• Your net investment income for the year, OR
• The amount by which your Modified Adjusted Gross Income (MAGI) exceeds the threshold for your filing status

It applies to individuals, estates, and trusts. For individuals, the thresholds are:

*The estate and trust threshold is adjusted annually for inflation. The individual thresholds have been frozen at their 2013 levels since the NIIT was enacted.

For most taxpayers, MAGI equals your Adjusted Gross Income (AGI) from line 11 of your Form 1040. The IRS explains this calculation in Form 8960 instructions.

What Counts as Net Investment Income?

Not all investment-related income triggers the NIIT. The tax applies only to specific categories defined in IRS Topic 559. Here is a breakdown of what counts and what does not:

A few important nuances worth noting: rental income is only subject to NIIT if it is passive — meaning you do not materially participate in managing the rental as a real estate professional. If you qualify as a real estate professional under IRS rules and your rental activity is therefore active, the income may escape the NIIT. Similarly, income from a business where you materially participate (spending 500+ hours per year) is generally not net investment income.

Municipal bond interest is a popular NIIT avoidance tool: the interest is both federal-income-tax-exempt and excluded from net investment income, making it doubly valuable for high-income investors.

Worked Example: NIIT at $225,000 Income

Let’s walk through a complete example. Consider Sarah, a single filer in 2026 who earns:

• $180,000 in wages from her job
• $28,000 in long-term capital gains from selling stock
• $17,000 in qualified dividends from her brokerage account

Sarah’s total income is $225,000. Here is how her NIIT is calculated:

Sarah owes $950 in NIIT on top of her regular income tax and the 15% preferential rate she pays on qualified dividends and long-term capital gains. This is reported on Form 8960 and added to her total tax bill.

Notice the key mechanic: the NIIT does not apply to all $45,000 of her investment income. It applies only to the portion of income that exceeds the $200,000 threshold, which is just $25,000. If Sarah had earned $199,000 in wages and the same investment income, her MAGI over the threshold would have been $199,000 + $45,000 − $200,000 = $44,000 — and the NIIT would have applied to the full $44,000.

How to Calculate and Report the NIIT

You calculate and pay the NIIT using IRS Form 8960, which is attached to your Form 1040 when you file your federal tax return. The form walks through the calculation in three parts:

1. Part I — Net Investment Income: Add up all categories of net investment income (taxable interest, dividends, capital gains, rental/royalty income, and other income).
2. Part II — MAGI: Enter your MAGI and calculate the amount above the threshold for your filing status.
3. Part III — Tax: Apply the 3.8% rate to the lesser of Part I or Part II to arrive at your NIIT.

If you pay quarterly estimated taxes (because you have significant investment income or self-employment income), you may need to include estimated NIIT in those payments to avoid an underpayment penalty. The IRS recommends using its Tax Withholding Estimator or Form 1040-ES to account for it.

NIIT + Capital Gains Tax: Your True Rate on Investments

The NIIT is a separate tax that stacks on top of your regular income tax rates and the preferential capital gains rates. For high-income investors, this means your effective rate on long-term capital gains and qualified dividends can reach 23.8% — not just the advertised 20%.

• 0% capital gains rate + 0% NIIT (below threshold) = 0%
• 15% capital gains rate + 0% NIIT (below threshold) = 15%
• 20% capital gains rate + 3.8% NIIT (above threshold) = 23.8%

Similarly, for ordinary investment income (short-term gains, taxable interest) that sits in the 37% federal bracket, the NIIT adds another 3.8%, bringing the combined federal rate to 40.8% before state taxes. This is why tax planning around investment income is so important for high earners.

7 Strategies to Reduce Your NIIT

Because the NIIT has two components — net investment income and MAGI above a threshold — you can reduce it by either lowering investment income or lowering MAGI. Here are seven legitimate strategies:

1. Maximize Retirement Account Contributions

Traditional 401(k) and IRA contributions reduce your MAGI, which in turn reduces your MAGI over the NIIT threshold. The 2026 401(k) employee contribution limit is $23,500 ($31,000 if you are 50 or older). Every dollar you contribute moves you closer to — or further below — the threshold. (IRS — 401(k) Contribution Limits)

2. Invest in Municipal Bonds

Interest from municipal bonds is excluded from both gross income (for federal tax purposes) and from net investment income for NIIT purposes. For a high-income investor, muni bonds’ tax-equivalent yield can significantly outpace taxable bonds. This is a double win — no income tax, no NIIT.

3. Tax-Loss Harvesting

Selling investments at a loss offsets capital gains, directly reducing your net investment income for NIIT purposes. A $10,000 capital loss offsetting $10,000 in gains saves you $380 in NIIT alone (3.8% × $10,000), on top of the income tax savings.

4. Shift to Growth Stocks That Pay No Dividends

Dividends are subject to NIIT each year they are paid. Unrealized capital gains on growth stocks are not. By holding stocks that reinvest earnings instead of paying dividends, you defer the NIIT until you eventually sell — when you can choose the timing and amount of gain to realize.

5. Contribute to an HSA

Health Savings Account contributions reduce your MAGI on a dollar-for-dollar basis (up to $4,300 for self-only coverage or $8,550 for family coverage in 2026). Lower MAGI means less income above the NIIT threshold. (IRS — Publication 969: HSAs)

6. Use Charitable Remainder Trusts or Donor-Advised Funds

Donating appreciated securities to a donor-advised fund or charitable remainder trust lets you avoid capital gains tax on the appreciation — and since you never recognize the gain, it never becomes net investment income subject to NIIT. You also receive a charitable deduction that lowers your MAGI.

7. Materially Participate in Rental Properties

If you qualify as a real estate professional under IRS Publication 527 rules (spending more than 750 hours per year in real estate activities, with that being more than 50% of your total working time), your rental income may be classified as non-passive — removing it from net investment income. This is a complex determination and typically requires working with a tax professional.

NIIT vs. Additional Medicare Tax: What’s the Difference?

High earners often get confused between the NIIT and the Additional Medicare Tax (AMT). They have the same income thresholds ($200,000 single, $250,000 married) but apply to completely different types of income:

• NIIT (3.8%) applies to investment income — dividends, capital gains, rental income, etc. It does not apply to wages or self-employment income.
• Additional Medicare Tax (0.9%) applies to wages and self-employment income above the threshold. It does not apply to investment income.

In theory, both taxes could apply simultaneously to different parts of your income: a single person earning $220,000 in wages and $30,000 in dividends would owe an Additional Medicare Tax on $20,000 of wages (0.9% × $20,000 = $180) AND a NIIT on $30,000 of investment income (3.8% × $30,000 = $1,140) — a combined surcharge of $1,320 on top of regular income tax.

Does the NIIT Affect Your Quarterly Estimated Taxes?

Yes. If you have significant investment income that is not subject to withholding — such as capital gains from selling a rental property or large dividends from a taxable brokerage — you may need to increase your quarterly estimated tax payments to include the NIIT.

Under the IRS safe harbor rule, you generally avoid underpayment penalties if you either pay 90% of the current year’s tax liability or 100% of your prior year’s tax liability (110% if your prior-year AGI exceeded $150,000). Since the NIIT is part of your total tax liability, it is included in these calculations. (IRS — Form 1040-ES Instructions)

If you receive a large one-time capital gain — for example, from selling a business, investment property, or large block of stock — you can often cover the NIIT liability by adjusting your withholding on other income for the remainder of the year rather than making a separate estimated payment. Your payroll department can withhold additional federal tax from your wages using a revised Form W-4.

The Bottom Line

The Net Investment Income Tax adds a 3.8% surcharge on investment income for individuals earning above $200,000 (single) or $250,000 (married filing jointly). It applies to dividends, capital gains, rental income, and other passive income — but not to wages, Social Security benefits, retirement account distributions, or municipal bond interest.

The tax is calculated on the lesser of (a) your net investment income or (b) the amount your MAGI exceeds the threshold. This means it does not always hit your entire investment income — only the portion that pushes you above the limit.

With smart planning — maxing out retirement accounts, using HSAs, harvesting losses, holding growth stocks, or shifting to tax-exempt bonds — many investors can reduce or eliminate their NIIT exposure. The NIIT thresholds are not indexed for inflation, so even middle-income investors with significant investment income may eventually encounter it as their portfolios grow.

If you expect to owe the NIIT, consult a tax professional before year end — most NIIT strategies need to be executed during the tax year, not after. Once December 31 passes, your options for reducing net investment income for that year are gone.

Sources

• IRS — Topic 559: Net Investment Income Tax
• IRS — About Form 8960, Net Investment Income Tax
• IRS — Net Investment Income Tax FAQs
• IRS — 401(k) Contribution Limits
• IRS — Publication 969: HSAs and Other Tax-Favored Health Plans
• IRS — Publication 527: Residential Rental Property
• IRS — About Form 1040-ES, Estimated Tax for Individuals
• IRS — Tax Withholding Estimator