High-income investors face a 3.8% surtax on top of their regular capital gains tax. The Net Investment Income Tax (NIIT) applies to capital gains, dividends, interest, and rental income once your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly). This pushes the top effective capital gains rate to 23.8% for the highest earners.
What Is the Net Investment Income Tax?
The NIIT is a 3.8% federal surtax on investment income enacted under the Affordable Care Act (ACA) in 2013. It is separate from — and in addition to — the regular income tax and capital gains tax. High earners effectively pay a combined rate of:
- 18.8% on long-term capital gains (15% + 3.8% NIIT)
- 23.8% on long-term capital gains at the top bracket (20% + 3.8% NIIT)
- 40.8% on short-term capital gains at the top bracket (37% ordinary income + 3.8% NIIT)
The NIIT is reported on Form 8960 and added to your regular tax liability.
2026 NIIT Income Thresholds
| Filing Status | MAGI Threshold |
|---|---|
| Single | $200,000 |
| Married Filing Jointly | $250,000 |
| Head of Household | $200,000 |
| Married Filing Separately | $125,000 |
| Estates and Trusts | $15,200 (approximate) |
Important: Unlike most tax thresholds, the NIIT thresholds are not adjusted for inflation. They have been fixed at these levels since 2013. In 2013, $200,000 was a high-earner threshold. In 2026, inflation has eroded that boundary and more middle-income professionals are affected.
What Income Is Subject to the NIIT?
Included (subject to NIIT)
- Long-term and short-term capital gains from stocks, real estate, and other assets
- Qualified and ordinary dividends
- Taxable interest income
- Rental and royalty income from passive activities
- Passive business income (partnerships, S-corps where you don’t materially participate)
- Gains from selling business interests where you are passive
Excluded (NOT subject to NIIT)
- Wages, salaries, and self-employment income
- Active business income (where you materially participate)
- Social Security benefits
- Alimony (for pre-2019 agreements)
- Distributions from IRAs, 401(k)s, and qualified retirement plans
- Tax-exempt municipal bond interest
- Gain from the sale of a primary residence within the $250,000/$500,000 exclusion
How to Calculate the NIIT
The NIIT is 3.8% of the lesser of:
- Your net investment income, OR
- The amount by which your MAGI exceeds the threshold
Example 1 — Small amount of investment income:
- Married couple, MAGI $300,000 (wages $280,000 + dividends $20,000)
- Net investment income: $20,000
- MAGI over threshold: $300,000 − $250,000 = $50,000
- Lesser amount: $20,000
- NIIT: 3.8% × $20,000 = $760
Example 2 — Large capital gain:
- Single filer, MAGI $350,000 (wages $220,000 + capital gain $130,000)
- Net investment income: $130,000
- MAGI over threshold: $350,000 − $200,000 = $150,000
- Lesser amount: $130,000
- NIIT: 3.8% × $130,000 = $4,940
Example 3 — High earner with mixed income:
- Single filer, $600,000 total MAGI ($450,000 wages + $150,000 investment income)
- Net investment income: $150,000
- MAGI over threshold: $600,000 − $200,000 = $400,000
- Lesser amount: $150,000
- NIIT: 3.8% × $150,000 = $5,700
Combined Capital Gains Rates With NIIT (2026)
| Tax Situation | Long-Term Rate | + NIIT | Combined Rate |
|---|---|---|---|
| Income below $48,350 (single) | 0% | N/A | 0% |
| Income $48,350–$200,000 (single) | 15% | N/A | 15% |
| Income $200,001–$533,400 (single) | 15% | 3.8% | 18.8% |
| Income over $533,400 (single) | 20% | 3.8% | 23.8% |
| Income below $96,700 (MFJ) | 0% | N/A | 0% |
| Income $96,700–$250,000 (MFJ) | 15% | N/A | 15% |
| Income $250,001–$600,050 (MFJ) | 15% | 3.8% | 18.8% |
| Income over $600,050 (MFJ) | 20% | 3.8% | 23.8% |
How NIIT Interacts With State Taxes
Most states that tax capital gains do so at ordinary income rates and do not have a separate NIIT equivalent. California, for example, taxes capital gains as ordinary income (up to 13.3%), so a California investor at the top bracket could pay:
- 20% federal long-term capital gains
- 3.8% NIIT
- 13.3% California state tax
- Combined: ~37% on long-term capital gains
Strategies to Reduce the NIIT
1. Tax-Loss Harvesting
Realizing capital losses reduces net investment income directly, reducing or eliminating the NIIT base.
2. Municipal Bonds
Interest from federal and often state-issued municipal bonds is excluded from both gross income and NIIT. High earners above the thresholds should compare after-tax yields when selecting fixed-income investments.
3. Roth IRA Conversion Timing
Converting traditional IRA funds to a Roth IRA increases MAGI in the conversion year (potentially triggering more NIIT on existing investment income), but eliminates future taxable RMDs. Plan conversions in years when investment income is lower.
4. Timing Capital Gains Realization
If you have control over when you receive capital gains (selling a business, real estate), spreading recognition across multiple years may keep each year’s MAGI below or closer to the threshold.
5. Qualified Opportunity Zone Investments
Gains reinvested in Qualified Opportunity Zone Funds (QOZ) defer the original gain and may eliminate future appreciation from both capital gains tax and NIIT if held 10+ years.
6. Charitable Strategies
Donating appreciated assets directly to charity — or using a charitable remainder trust — eliminates the capital gain entirely, reducing NIIT exposure.
7. Active Business Participation
Income from a business in which you materially participate is not subject to the NIIT. Converting passive income to active income through increased material participation can remove it from the NIIT base.
Filing: Form 8960
The NIIT is calculated and reported on IRS Form 8960 (Net Investment Income Tax — Individuals, Estates, and Trusts). The resulting tax is added to your regular tax liability on Schedule 2 of Form 1040. Most tax software handles Form 8960 automatically when you enter investment income that triggers the NIIT threshold.
The NIIT stacks on top of the standard long-term capital gains rates — see 2026 capital gains tax rates for the 0%, 15%, and 20% income thresholds. Tax-loss harvesting is one of the most effective ways to reduce net investment income; the wash sale rule explains the 30-day restriction on repurchasing harvested positions. For the full range of legal strategies to reduce capital gains and NIIT exposure, see how to avoid capital gains tax.
The content on Wealthvieu is for informational purposes only and should not be considered financial, tax, or investment advice. Consult a qualified professional before making financial decisions. Full disclaimer · Editorial policy