Definition
The Net Investment Income Tax (NIIT) is a federal 3.8% tax. For individuals, it applies to the lesser of net investment income or the amount modified adjusted gross income (MAGI) exceeds the filing-status threshold.
This is different from fund net investment income (NII), an accounting measure of a fund's investment income after expenses. A fund's NII does not determine whether its shareholder owes NIIT.
Why It Matters
NIIT can add to the federal tax on dividends and gains. Its threshold uses MAGI, so the fund's payout rate alone cannot tell you whether the tax applies.
How It Is Calculated
| Filing status | MAGI threshold |
|---|---|
| Single or head of household | $200,000 |
| Married filing jointly or qualifying surviving spouse | $250,000 |
| Married filing separately | $125,000 |
For individuals:
NIIT = 3.8% × min(net investment income, max(0, MAGI − threshold))
Investment income can include taxable interest, dividends, capital gains, rents, royalties, and certain passive business income, after applicable deductions. Qualified dividends can be subject to NIIT in addition to their regular federal tax rate. Wages are not net investment income, but can increase MAGI.
Example
A single filer has $220,000 of MAGI and $30,000 of net investment income. The excess over the $200,000 threshold is $20,000. NIIT is therefore 3.8% of $20,000, or $760, rather than 3.8% of each investment dollar.
Common Mistakes
- Confusing fund NII with the shareholder's taxable net investment income.
- Applying 3.8% to all investment income as soon as MAGI crosses a threshold.
- Using taxable income instead of MAGI to test the threshold.
- Assuming monthly distributions or qualified dividends are exempt.
FAQ
Is NIIT the same as fund NII?
No. Fund NII is an accounting figure. NIIT is a separate federal tax calculation based on the taxpayer's income and circumstances.
Does this formula apply to estates and trusts?
Estates and trusts have separate rules and thresholds. Consult the IRS instructions for Form 8960 rather than applying the individual thresholds above.
Where can I verify the rules?
See IRS Topic 559 and the Form 8960 instructions. This is educational information, not tax advice. This lesson covers general federal rules verified September 5, 2026; individual circumstances and state taxes require separate consideration. Keep the tax year, filing status, and investment-income records together when reviewing a potential liability, and use the applicable Form 8960 instructions to determine which items and deductions belong in the calculation.
