Net Investment Income Tax (NIIT) Guide 2026: 3.8% Surtax Thresholds & Reduction Strategies
Complete guide to the 3.8% Net Investment Income Tax for American investors. Learn MAGI thresholds ($200K single, $250K married), applicable income types, and strategies to reduce NIIT.
What Is the Net Investment Income Tax?
The Net Investment Income Tax (NIIT) is a 3.8% surtax on investment income for high earners. Enacted as part of the Affordable Care Act in 2013, it's sometimes called the "Obamacare tax" or Medicare surtax.
Unlike regular income tax, which most people plan for, NIIT catches many investors by surprise. If your income exceeds certain thresholds, you'll pay an additional 3.8% on investment income - on top of regular income tax and capital gains tax.
The Bottom Line Impact
| Tax Type | Base Rate | With NIIT | Difference |
|---|---|---|---|
| Long-term capital gains (top bracket) | 20% | 23.8% | +3.8% |
| Qualified dividends (top bracket) | 20% | 23.8% | +3.8% |
| Interest income (top bracket) | 37% | 40.8% | +3.8% |
| Ordinary dividends (top bracket) | 37% | 40.8% | +3.8% |
Who Pays NIIT?
You're subject to NIIT if you have:
- Net investment income, AND
- Modified Adjusted Gross Income (MAGI) above the threshold for your filing status
Both conditions must be met. If you have no investment income, you don't pay NIIT. If your MAGI is below the threshold, you don't pay NIIT.
MAGI Thresholds
The NIIT applies when your Modified Adjusted Gross Income exceeds these thresholds:
2026 NIIT Thresholds
| Filing Status | MAGI Threshold | Notes |
|---|---|---|
| Single | $200,000 | Not indexed for inflation |
| Married Filing Jointly | $250,000 | Not indexed for inflation |
| Married Filing Separately | $125,000 | Half of married threshold |
| Head of Household | $200,000 | Same as single |
| Qualifying Widow(er) | $250,000 | Same as married filing jointly |
Critical Point: No Inflation Adjustment
Unlike tax brackets, the NIIT thresholds are NOT indexed for inflation. The $200,000/$250,000 limits have been the same since 2013. As incomes rise with inflation, more people become subject to NIIT each year.
| Year | Threshold (MFJ) | Inflation-Adjusted Equivalent | Bracket Creep |
|---|---|---|---|
| 2013 | $250,000 | $250,000 | 0% |
| 2020 | $250,000 | $282,000 | 13% |
| 2026 | $250,000 | ~$340,000 | ~36% |
Someone earning $250,000 in 2026 has less purchasing power than someone earning $250,000 in 2013, yet they pay the same NIIT threshold.
MAGI Calculation
For NIIT purposes, MAGI equals your Adjusted Gross Income (AGI) with certain modifications. For most taxpayers, MAGI equals AGI. The main adjustment is adding back any foreign earned income exclusion.
What Income Is Subject to NIIT?
The NIIT applies to "net investment income" - but what counts?
Income Subject to NIIT
| Income Type | Subject to NIIT? | Notes |
|---|---|---|
| Interest income | Yes | Bank interest, bond interest |
| Dividends | Yes | Both qualified and ordinary |
| Capital gains | Yes | Both short-term and long-term |
| Rental income (net) | Yes* | *Unless you're a real estate professional |
| Royalties | Yes | Books, patents, minerals |
| Passive business income | Yes | From businesses you don't actively run |
| Annuity income (non-qualified) | Yes | Taxable portion |
| Gains from investment property | Yes | Including vacation homes |
Income NOT Subject to NIIT
| Income Type | Subject to NIIT? | Notes |
|---|---|---|
| Wages and salaries | No | Already subject to Medicare tax |
| Self-employment income | No | Subject to SE tax instead |
| Active business income | No | From businesses you run |
| Social Security benefits | No | Even if taxable |
| Retirement distributions | No | 401(k), IRA, pension |
| Tax-exempt interest | No | Municipal bonds |
| Gain from selling primary residence | No* | *Excluded portion under Section 121 |
| Qualified retirement plan distributions | No | Including Roth |
Key planning insight: Income from retirement accounts is NOT subject to NIIT. This makes Roth conversions and traditional IRA/401(k) distributions more attractive in some cases - you avoid both regular income tax (with Roth) and NIIT.
Calculating Your NIIT
The 3.8% tax applies to the LESSER of:
- Your net investment income, OR
- The amount by which your MAGI exceeds the threshold
NIIT Formula
NIIT = 3.8% x min(Net Investment Income, MAGI - Threshold)
Calculation Example 1: MAGI Slightly Over Threshold
| Item | Amount |
|---|---|
| Wages | $240,000 |
| Investment income (dividends, gains) | $50,000 |
| MAGI | $290,000 |
| Threshold (MFJ) | $250,000 |
| MAGI over threshold | $40,000 |
| Net investment income | $50,000 |
| Lesser amount | $40,000 |
| NIIT (3.8%) | $1,520 |
Calculation Example 2: High Investment Income
| Item | Amount |
|---|---|
| Wages | $150,000 |
| Investment income (dividends, gains, interest) | $200,000 |
| MAGI | $350,000 |
| Threshold (MFJ) | $250,000 |
| MAGI over threshold | $100,000 |
| Net investment income | $200,000 |
| Lesser amount | $100,000 |
| NIIT (3.8%) | $3,800 |
Calculation Example 3: High Earner With Large Capital Gain
| Item | Amount |
|---|---|
| Wages | $400,000 |
| Capital gain (stock sale) | $500,000 |
| MAGI | $900,000 |
| Threshold (MFJ) | $250,000 |
| MAGI over threshold | $650,000 |
| Net investment income | $500,000 |
| Lesser amount | $500,000 |
| NIIT (3.8%) | $19,000 |
Real-World NIIT Examples
Scenario: Selling Appreciated Stock
A married couple sells stock with $300,000 in long-term capital gains. Their salary income is $280,000.
| Tax Component | Calculation | Amount |
|---|---|---|
| Long-term capital gains tax (20%) | $300,000 x 20% | $60,000 |
| NIIT | $300,000 x 3.8% | $11,400 |
| Total tax on gain | - | $71,400 |
| Effective rate on gain | $71,400 / $300,000 | 23.8% |
Scenario: Rental Property Income
Investor has $180,000 salary and $70,000 net rental income.
| Item | Amount |
|---|---|
| MAGI | $250,000 |
| Threshold (single) | $200,000 |
| MAGI over threshold | $50,000 |
| Net investment income | $70,000 |
| Lesser amount | $50,000 |
| NIIT | $1,900 |
Scenario: Selling Investment Property
Married couple sells rental property for $200,000 gain. Combined salary is $300,000.
| Tax Component | Amount |
|---|---|
| Capital gains on appreciation (15%) | $30,000 |
| Depreciation recapture (25%) | Variable |
| NIIT on $200,000 gain (3.8%) | $7,600 |
| State tax (depends on state) | Variable |
Strategies to Reduce NIIT
Strategy 1: Reduce MAGI
If you can get MAGI below the threshold, you eliminate NIIT entirely.
| MAGI Reduction Tactic | Potential Reduction |
|---|---|
| Max 401(k) contributions | $23,500 (2026) |
| HSA contributions | $8,550 (family, 2026) |
| Traditional IRA deduction | $7,000 |
| Self-employed retirement plans | Up to $69,000 |
| Charitable donations (bunching) | Variable |
Strategy 2: Reduce Net Investment Income
| Tactic | How It Helps |
|---|---|
| Tax-loss harvesting | Offset gains with losses |
| Municipal bonds | Tax-exempt interest not subject to NIIT |
| Growth stocks over dividend stocks | Defer gains until sale |
| Installment sales | Spread gain over multiple years |
| Opportunity zone investments | Defer and potentially reduce gains |
Strategy 3: Reclassify Income
Some income can be classified as active rather than passive, avoiding NIIT:
- Real estate professional status: Rental income becomes active
- Material participation in businesses: Converts passive to active income
- S-corp election: Reasonable salary not subject to NIIT
Strategy 4: Time Income and Deductions
| Situation | Strategy |
|---|---|
| Year with low income | Accelerate gains into this year |
| Year with high income | Defer gains to next year if possible |
| Near threshold | Bunch deductions to get below |
| Large one-time gain expected | Spread over installment sale |
Strategy 5: Asset Location
Hold tax-inefficient investments in retirement accounts:
| Investment | Best Location | Why |
|---|---|---|
| Bond funds | Traditional IRA/401(k) | Avoid NIIT + ordinary rates on interest |
| REITs | Traditional IRA/401(k) | Dividends taxed as ordinary + NIIT |
| Actively traded funds | Tax-advantaged | Short-term gains + NIIT |
| Index funds | Taxable account | Low turnover, qualified dividends |
| Municipal bonds | Taxable account | Tax-exempt, no NIIT |
Common NIIT Situations
Home Sale
The Section 121 exclusion ($250K single, $500K married) protects most home sale gains from NIIT. But gains above the exclusion are subject to both capital gains tax and NIIT.
| Scenario | Gain | Exclusion | Taxable | NIIT (if over threshold) |
|---|---|---|---|---|
| Married, $400K gain | $400,000 | $500,000 | $0 | $0 |
| Married, $700K gain | $700,000 | $500,000 | $200,000 | $7,600 |
| Single, $350K gain | $350,000 | $250,000 | $100,000 | $3,800 |
Retirement Distributions
Good news: retirement account distributions are NOT subject to NIIT. This includes:
- 401(k) and 403(b) distributions
- Traditional IRA distributions
- Roth IRA distributions
- Pension payments
- Required Minimum Distributions
However, these distributions DO count toward MAGI, potentially pushing other investment income into NIIT territory.
Business Sales
Gain from selling a passive business interest is subject to NIIT. Gain from selling an active business you materially participate in is generally exempt.
NIIT Planning Tips
Estimate Your NIIT Quarterly
Include NIIT in quarterly estimated tax payments to avoid underpayment penalties:
- Project annual MAGI
- Estimate net investment income
- Calculate expected NIIT
- Add to quarterly estimates
Year-End Planning Checklist
| Task | Timing | Impact |
|---|---|---|
| Review year-to-date income | October | Know if you'll exceed threshold |
| Harvest losses | November-December | Reduce NII |
| Max retirement contributions | By year-end | Reduce MAGI |
| Consider charitable bunching | December | Reduce MAGI below threshold |
| Defer income if possible | December | Push into lower-income year |
Long-Term Planning
- Asset location: Review where you hold different investments
- Investment selection: Consider municipal bonds for high earners
- Roth conversions: Build tax-free income not subject to NIIT
- Real estate professional status: If you qualify, it converts passive to active
NIIT Impact Over Time
| Annual NII | Annual NIIT | 10-Year Cost | 30-Year Cost |
|---|---|---|---|
| $50,000 | $1,900 | $19,000 | $57,000 |
| $100,000 | $3,800 | $38,000 | $114,000 |
| $200,000 | $7,600 | $76,000 | $228,000 |
| $500,000 | $19,000 | $190,000 | $570,000 |
The NIIT is a permanent feature of the tax code that affects more people each year due to bracket creep. At 3.8%, it's easy to overlook, but for high earners with significant investment income, it adds up to substantial amounts over time. Build NIIT planning into your overall tax strategy.
This is educational content, not tax advice. Individual tax situations vary significantly. Consult a qualified tax professional for advice specific to your circumstances.
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