Net Investment Income Tax (NIIT)

The Net Investment Income Tax (NIIT) is a 3.8% surtax under IRC Section 1411 on net investment income when modified adjusted gross income exceeds:

• $200,000 single
• $250,000 married filing jointly
• $125,000 married filing separately

What counts as net investment income

• Interest, dividends, annuities, royalties
• Net capital gains
• Rental and royalty income (unless from a non-passive activity)
• Income from passive activities
• Income from trading businesses (rarely)

Excluded:

• Salary, wages, business income from active participation
• Retirement-account distributions
• Social Security
• Tax-exempt municipal-bond interest

How it's calculated

NIIT = 3.8% × lesser of:

• Net investment income, or
• (MAGI − threshold)

So a high-income household with MAGI $500K and $50K of investment income pays 3.8% on the full $50K (or on $250K, whichever is smaller — here $50K).

Planning levers

• Roth conversions: converting in a year already over the threshold doesn't add NIIT to the conversion itself (Roth conversions are not investment income), but the conversion does raise MAGI for the next year's threshold calculation
• Asset location: putting income-producing investments in tax-deferred accounts moves the dividends and interest out of NIIT exposure
• Year-end planning: defer realizations or accelerate deductions to land below the threshold
• Real Estate Professional status: rental income becomes non-passive, generally outside NIIT