Net Investment Income Tax (NIIT)
Also: NIIT, net investment income tax, Medicare surtax on investment income, 3.8% surtax
A 3.8% federal tax on investment income for filers whose modified AGI exceeds $200,000 single or $250,000 married. Applies to interest, dividends, capital gains, rents, and passive business income.
The Net Investment Income Tax is a 3.8% federal surtax imposed by IRC Section 1411 on the lesser of net investment income or the excess of modified AGI over the threshold. Thresholds are $200,000 single, $250,000 married filing jointly, and $125,000 married filing separately. Wages and self-employment income are not investment income but do count toward the MAGI threshold. Capital gains, dividends, interest, rental income, and passive partnership income are subject to NIIT.
Example: a married filer has $480,000 MAGI including $220,000 of investment income. MAGI excess over $250,000 is $230,000. Because $220,000 of net investment income is the lesser, the 3.8% tax applies to $220,000, producing $8,360 of NIIT on Form 8960.
Common mistake: overlooking NIIT in exercise-year planning. A $500,000 capital gain from an IPO tender creates $19,000 of NIIT that many filers don’t anticipate. The same gain plus a Roth conversion pushes the entire capital gain into NIIT territory.
NIIT matters at every capital gain sizing decision, at K-1 income from investments, and at Roth conversion years where MAGI jumps.