Net Investment Income Tax Calculator: The 3.8% Surtax Explained

The net investment income tax (NIIT) is a 3.8% surtax on investment income for high earners. It was created by the Affordable Care Act in 2013 and has never been indexed for inflation, which means more people hit it every year.

Most people who owe it do not realize they do. It adds to your capital gains tax rate, your dividend tax rate, and your tax on rental income.

Who Pays the NIIT

The 3.8% applies to the lesser of:

• Your net investment income, OR
• The amount your MAGI exceeds the threshold

2026 Income Thresholds:

| Filing Status | MAGI Threshold | |--------------|----------------| | Single | $200,000 | | Married Filing Jointly | $250,000 | | Married Filing Separately | $125,000 | | Head of Household | $200,000 |

These thresholds are not indexed for inflation. At a 3% inflation rate, the real value of these thresholds declines every year, pulling more people into the surtax.

How the NIIT Is Calculated

Single filer, $220,000 wages, $30,000 in capital gains and dividends:

| Item | Amount | |------|--------| | Total MAGI | $250,000 | | MAGI above threshold ($200k) | $50,000 | | Net investment income | $30,000 | | NIIT applies to the lesser | $30,000 | | NIIT at 3.8% | $1,140 |

Single filer, $180,000 wages, $30,000 in capital gains:

| Item | Amount | |------|--------| | Total MAGI | $210,000 | | MAGI above threshold ($200k) | $10,000 | | Net investment income | $30,000 | | NIIT applies to the lesser | $10,000 | | NIIT at 3.8% | $380 |

The NIIT is capped by how far above the threshold you are, so it is not an all-or-nothing tax.

What Counts as Net Investment Income

Included:

• Dividends (qualified and non-qualified)
• Interest income
• Capital gains (short and long-term)
• Rental income (net of expenses)
• Royalties
• Passive business income
• Annuity income (above cost basis)

Not included:

• Wages and salaries
• Self-employment income
• Active business income (non-passive)
• Social Security benefits
• Tax-exempt municipal bond interest
• Distributions from qualified retirement plans (401k, IRA)
• Gain from selling your primary residence up to $250,000/$500,000 exclusion

The Combined Rate on Capital Gains for High Earners

For a married filer with $300,000 income selling stock with long-term gains:

| Tax | Rate | |-----|------| | Federal long-term capital gains | 15% | | Net Investment Income Tax | 3.8% | | State capital gains (assume 5%) | 5% | | Total effective rate | 23.8% |

For top earners (income above $583,750 single/$696,450 MFJ in 2026), the federal rate is 20% + 3.8% NIIT = 23.8% federal alone.

Strategies to Reduce NIIT

Tax-loss harvesting. Capital losses offset capital gains dollar-for-dollar, reducing net investment income.

Roth conversions in lower-income years. Roth IRA and Roth 401k distributions are not subject to NIIT. Converting traditional IRA money to Roth in years when you are below the threshold reduces future NIIT exposure.

Municipal bonds. Interest from muni bonds is excluded from net investment income. At high income levels, the after-tax yield on munis can exceed taxable bonds.

Primary residence exclusion. The $250,000 (single) or $500,000 (married) home sale exclusion applies. If your gain is within the exclusion, it does not count as investment income for NIIT purposes.

Business participation. If you are a material participant in a business (not passive), the income is active, not investment income. Real estate professionals who qualify under IRS rules can treat rental income as active.

See Best Investing Platforms for tax-efficient investment account options.

Use the CalcMoney Capital Gains Calculator to model your total tax liability including NIIT at different income and gain levels.

Frequently Asked Questions

Does NIIT apply to IRA withdrawals?

No. Distributions from traditional IRAs and 401k plans are not net investment income. They are ordinary income, which may increase your MAGI and push investment income into NIIT territory, but the distribution itself is not subject to the 3.8%.

What is MAGI for NIIT purposes?

For NIIT, MAGI is essentially your adjusted gross income with certain foreign income add-backs. It is very close to your regular AGI for most people.

Does the NIIT apply to qualified retirement plan distributions?

No. Distributions from 401k plans, traditional IRAs, SEP-IRAs, SIMPLE IRAs, and pension plans are exempt from NIIT. This is one reason Roth conversions (while adding to MAGI today) can reduce long-term NIIT exposure by reducing future taxable retirement distributions.