What Income Is Subject to the NIIT?
Net Investment Income Tax — what is and is not subject to the 3.8% surcharge
| Income Type | Subject to NIIT? | Notes |
|---|---|---|
| Long-term capital gains | Yes | From stocks, real estate, mutual funds, ETFs |
| Short-term capital gains | Yes | Same as long-term for NIIT purposes |
| Qualified dividends | Yes | All dividend income counts |
| Interest income | Yes | Savings account, bond interest, CDs |
| Rental income (passive) | Yes | Most residential rentals are passive |
| Wages and salary | No | NIIT applies only to investment income |
| Active business income | No | Material participation required |
| IRA and 401(k) distributions | No | Retirement distributions are not net investment income |
| Social Security benefits | No | Even taxable portion is not NIIT subject |
How the NIIT Is Calculated
The NIIT applies to the lesser of: (1) your net investment income, or (2) the amount by which your Modified Adjusted Gross Income (MAGI) exceeds the threshold ($200,000 single, $250,000 married jointly). This means if you have $50,000 in investment income but your MAGI is only $15,000 above the threshold, the NIIT applies to $15,000 — not the full $50,000.
Single filer: $175,000 in wages + $60,000 in capital gains = $235,000 MAGI. NIIT threshold: $200,000. Excess over threshold: $35,000. Net investment income: $60,000. NIIT applies to lesser: $35,000. NIIT owed: $35,000 × 3.8% = $1,330. Note: Even though the total capital gain is $60,000, only $35,000 is subject to NIIT because MAGI was only $35K above threshold.
Strategies to Reduce or Avoid NIIT
- Maximize 401(k) contributions: Reduces MAGI dollar for dollar — staying below the threshold eliminates NIIT entirely
- HSA contributions: Pre-tax contributions reduce MAGI if you have an HDHP
- Time large capital gains to lower-income years: MAGI below $200K/$250K = zero NIIT
- Use tax-loss harvesting to offset investment income subject to NIIT
- Move from passive rental to active real estate professional status: Active rental income is exempt from NIIT
- Invest in municipal bonds in taxable accounts: Tax-exempt interest is not net investment income
- Roth IRA conversions before high-income years: Reduces future RMD income and the NIIT exposure it creates
NIIT and the Annual Federal Tax Return
The NIIT is calculated on Form 8960 and flows to Schedule 2 (Additional Taxes) of your Form 1040. Employer withholding does not cover NIIT — you must either make estimated quarterly tax payments for NIIT or risk underpayment penalties. If you expect NIIT exposure in the current year, increase your estimated payments or withholding to cover the additional 3.8%.
Calculate Your Capital Gains Tax Including NIIT
Enter your income and capital gains to see whether the NIIT applies and how much it adds to your tax bill.