What is the net investment income tax?

The net investment income tax (NIIT) was put into law in 2013. It is a tax that high-income individuals might pay when they realize gains on investments. Because it is a relatively new tax, and salaries have risen, more people every year are finding themselves paying it for the first time. 

What is the net investment income tax?

When you make an investment, whether it’s purchasing a few stocks or a rental home, the goal is to make money on the deal. And when we make money, we generally pay taxes. With investments, it can get a little tricky, because any increase in value is considered unrealized capital gains until you actually sell them. Once you do sell an investment for profit, you will usually pay capital gains tax on it. On top of those taxes, some high-earning investors will pay an additional 3.8% NIIT if their total income is over certain thresholds. 

 Many investors don’t hear about the NIIT until they are surprised at tax time with an additional form and bill. That’s because the NIIT is fairly new. It was enacted as part of the Affordable Care Act in 2010 and officially took effect in 2013. On top of that, while other taxes have adjusted with inflation and salary growth over the past decade, the NIIT has remained steady. So, as incomes grow, more people every year are paying this tax for the first time. 

 This article covers the basics of the NIIT and how it might apply in some situations, but it should not be taken as individual investment or tax advice. You should always discuss your goals and needs with an experienced financial professional.

What counts as net investment income?

Your net investment income is calculated by taking your gross income from various investments and deducting certain qualified expenses (see minimizing NIIT below). This list is not exhaustive, but investment income commonly includes:

• Capital gains from selling investments or non-primary residence property
• Dividend income from things like stocks and mutual funds
• Taxable interest earned from bank accounts, loans, and bonds
• Income from rental property or royalties
• Passive income from trade or from businesses you don’t materially participate in 

Things like your salary or wages, Social Security benefits, and withdrawals from qualified retirement plans, such as 401(k)s and IRAs, don’t count as investment income, but they may still play a role, as they increase your overall income levels. 

What is the NIIT tax rate?

As of tax year 2026, the NIIT rate is 3.8%. This rate does not change based on your income levels or tax brackets. It is a flat tax on top of capital gains taxes once you are over certain investment and income thresholds.

What is Form 8960?

IRS Form 8960 is the form that helps you calculate how much you owe in NIIT.1 It includes form fields and information about your investment income, expenses, and tax calculations. You file it in addition to other tax forms with your yearly taxes. 

Who pays net investment income tax?

Due to inflation and rising salaries, more people each year will end up paying NIIT. Don’t let it surprise you. If you think you might need to pay it, plan for it early. There are two criteria for understanding if you will owe taxes under the NIIT rules:

• You have net investment income (see above).
• Your modified adjusted gross income (MAGI) is over these thresholds based on your filing status:
  • $200,000 if you’re filing single
  • $250,000 if married filing jointly
  • $125,000 if married filing separately

How do you calculate your modified adjusted gross income?

As with many tax calculations, finding your MAGI is more complicated than you might think. That’s why it’s so important to work with a tax professional and qualified financial professional to help you navigate and prepare for tax season. 

First, you must start with your adjusted gross income (AGI). Per the IRS, this is your income from all sources minus certain adjustments, such as retirement plan contributions, deductible health savings account contributions, and interest paid on student loans. On your Form 1040, your AGI is line 11.

Your modified adjusted gross income is your AGI with certain adjustments added back in, including the foreign earned income exclusion. Your MAGI is not included on your 1040, but you can find it in your IRS online account or last year’s tax return. See more details on the IRS AGI page. 

Two examples of net investment income taxes owed

Now that you understand if you may be subject to NIIT taxes, you’ll likely want to calculate how much you may owe. If you meet both criteria outlined above, the 3.8% tax is applied to whichever is less between:

• Your net investment income
• The portion of your MAGI that exceeds the threshold

There are a lot of specific and important calculations that go into NIIT figures. The following examples are simplified.

Example: You have high income and a few investments

In this example, let’s assume a married couple files their taxes jointly. Both have well-paid salaried jobs that account for most of their yearly income. Their income after adjustments (MAGI) is $400,000. Most of their investments go into tax-advantaged retirement accounts like a 401(k) and an IRA, which don’t count as investment income. But they did make $10,000 from the sale of some stocks this year.

• The couple’s MAGI is $150,000 over the threshold for married filing jointly ($250,000). 
• Their net investment income is $10,000.

They would pay 3.8% on the lower of those two numbers: their net investment income. In this scenario, they would owe $380 in NIIT taxes.

Example: Much of your income comes from investments

In this example, let’s assume a single person owns a few different rental properties. Their MAGI is $250,000, but since most of their income comes from those rental properties, their net investment income after deductions is $150,000.

• This individual’s MAGI is $50,000 over the threshold for filing single ($200,000). 
• Their net investment income is $150,000.

This person would pay 3.8% on the lower of those two numbers: this time their MAGI overage. In this scenario, they would owe $1,900 in NIIT taxes.

How to reduce NIIT taxes

Everyone should be employing a wide range of tax-efficient investing strategies, and the accounting for the NIIT is part of that. In addition to taking all of the deductions you are able to, there are two main ways to plan ahead in order to limit your NIIT liability: strategically reducing your MAGI or reducing your investment income. 

NIIT deductions and exclusions

As stated previously, wages and salary, retirement benefits, and other tax-exempt income sources are excluded from the definition of net investment income. But there are also a number of things you can remove from your NIIT calculation through deductions to lower your final number. Common deductions from your net investment income can include:

• Advisory or brokerage fees
• Rental expenses like maintenance and interest on loans
• Tax preparation fees
• State and local taxes related to investment income
• Realized losses on investments

Strategically lower your MAGI

Since contributions to traditional retirement plans are made with pre-tax dollars, they lower your taxable income, and thus your MAGI. If you find you may pay NIIT, and aren’t maximizing your retirement accounts, you may want to shuffle your investments around to do so, in order to save on taxes. 

Reduce investment income with tax-loss harvesting

Tax-loss harvesting is an advanced investing strategy that takes advantage of market volatility to offset your investment gains on paper and reduce your overall tax burden while maintaining a similar position in your portfolio. It’s something that is best discussed with a qualified financial professional before you attempt it. See rules and examples of tax-loss harvesting.

Net investment income tax FAQs

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¹“Instructions for Form 8960 (2024)” IRS.gov, 2024

Neither New York Life Insurance Company nor its Agents offer personal tax advice. Please consult your tax advisor to find out how the general concepts in this article may or may not apply to your personal circumstances.