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Question: Who owes the 3.8 percent Net Investment Income Tax and which income does it cover?

Net Investment Income Tax: How the 3.8 percent Surtax Applies to Dividends, Rent, and Capital Gains

The 3.8 percent Net Investment Income Tax applies when MAGI exceeds $200,000 for single filers or $250,000 for married filing jointly. Dividends, capital gains, rental income, and royalties can all count. Here is who owes it and how to report it on Form 8960.

Tax Planning4 min read

Quick answer

The Net Investment Income Tax is a 3.8 percent surtax on the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds $200,000 (single or head of household) or $250,000 (married filing jointly). It covers interest, dividends, capital gains, rental and royalty income, and non-qualified annuities. Wages, Social Security benefits, and most self-employment income are excluded. You calculate it on Form 8960.

Key points

  • The Net Investment Income Tax (NIIT) is a 3.8 percent surtax that has applied to certain passive investment income since January 1, 2013
  • Single filers and heads of household owe the tax when MAGI exceeds $200,000; married filing jointly filers when MAGI exceeds $250,000
  • NIIT covers a broad range of passive returns: interest, dividends, net capital gains, rental profits, royalties, and income from non-qualified annuities
  • Wages, Social Security benefits, unemployment compensation, alimony, and most self-employment income do not count as net investment income
  • Taxpayers who owe NIIT calculate and file Form 8960 attached to their individual return

What Is the Net Investment Income Tax?

Effective January 1, 2013, the IRS imposed a 3.8 percent surtax on certain investment income earned by individual taxpayers, estates, and trusts.[1] The NIIT does not apply to all income. It applies to the lesser of two amounts: your net investment income for the year, or the amount by which your modified adjusted gross income (MAGI) exceeds the statutory threshold for your filing status.[1]

For Miami-area investors, rental property owners, and high earners with significant portfolios, the NIIT is an additional layer of tax to plan around. Identifying which income falls inside the surtax base is the first step in any year-end review. Our advisory solutions team works with clients on that analysis before year-end so there is time to act.

MAGI Thresholds by Filing Status

Filing StatusMAGI Threshold
Single or head of household$200,000
Married filing jointly$250,000
Qualifying widow(er) with a child$250,000
Married filing separately$125,000

Income the IRS Includes in the NIIT Base

The IRS states that net investment income includes, but is not limited to, interest, dividends, capital gains, rental and royalty income, and non-qualified annuities.[3] For South Florida property owners, rental income is a critical category: net rental profit from passive real estate activities is included in the NIIT base when MAGI exceeds the threshold. Short-term rental owners who materially participate in their properties should also review Short-Term Rental Material Participation: The 7-Day Rule for Nonpassive Losses, as that classification can affect passive-income treatment and NIIT exposure. Capital gains from selling investment property that are not otherwise excluded from income also count. Our real estate + property management tax help page explains how passive-activity classification affects the NIIT calculation for rental owners.

Income the IRS Excludes from the NIIT Base

  • Wages and salaries[4]
  • Unemployment compensation[4]
  • Social Security benefits[4]
  • Alimony received[4]
  • Most self-employment income from active business operations[4]

Calculating and Reporting NIIT on Form 8960

Taxpayers who owe the NIIT must file Form 8960 and attach it to their federal individual return.[5] The IRS describes Form 8960 as the form taxpayers use to figure the amount of their net investment income tax.[6] The calculation involves listing net investment income components and computing the tax as 3.8 percent of the lesser of net investment income or the MAGI threshold excess.[1]

Because the calculation depends on accurate passive-activity income classification and the correct MAGI figure, errors are common when income sources are varied. Our individual tax return preparation service includes Form 8960 preparation for clients whose investment income may trigger the surtax.

Frequently asked questions

What are the MAGI thresholds for the Net Investment Income Tax?

The threshold depends on filing status. Single filers and heads of household owe the tax when MAGI exceeds $200,000. Married filing jointly filers and qualifying widow(er)s with a child hit the threshold at $250,000. Married filing separately filers face a $125,000 threshold. The IRS has not indexed these amounts for inflation since the tax took effect in 2013.

Does rental income from an investment property count as net investment income?

Yes. The IRS expressly includes rental and royalty income in the definition of net investment income. If your MAGI exceeds the threshold for your filing status, net rental profit from passive real estate activities is subject to the 3.8 percent surtax in addition to regular income tax.

Are wages or self-employment income subject to the Net Investment Income Tax?

No. The IRS states that wages, unemployment compensation, Social Security benefits, alimony, and most self-employment income do not count as net investment income. The NIIT targets passive investment income, not active earned income. High earners may face the separate Additional Medicare Tax on wages and self-employment earnings, but that is a distinct obligation with different rules.

What form do taxpayers use to calculate the Net Investment Income Tax?

Taxpayers calculate the NIIT on Form 8960 and attach it to their individual federal return. The IRS states that Form 8960 is the form used to figure the amount of net investment income tax.

Sources

  1. Net Investment Income Tax · Internal Revenue Service
  2. Net Investment Income Tax · Internal Revenue Service
  3. Net Investment Income Tax · Internal Revenue Service
  4. Net Investment Income Tax · Internal Revenue Service
  5. Net Investment Income Tax · Internal Revenue Service
  6. About Form 8960, Net Investment Income Tax Individuals, Estates, and Trusts · Internal Revenue Service