What is Net Investment Income Tax (NIIT) and Who Pays It?
Find out which income levels are subject to the 3.8% NIIT surtax.


If you don’t know what Net Investment Income Tax (NIIT) is, you’re not alone. This relatively new tax began a little over a decade ago but the number of taxpayers subject to the tax has increased.
For instance, data show that 3.1 million taxpayers were subject to NIIT in its first year. Just eight years later, that number more than doubled.
So what is NIIT and who must pay it?

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Read on to avoid surprises on your next tax bill and to find out how you might lower your net investment income.
What is net investment income tax (NIIT)?
The net investment income tax is a 3.8% tax you must pay if your modified adjusted gross income (MAGI) exceeds a certain threshold. (More on that later).
Taxpayers meeting that income threshold pay the tax on the lesser of:
- Net investment income, OR
- The amount exceeding MAGI
The income thresholds are not indexed for inflation, meaning if inflation were to rise, you would pay a higher tax percentage on the same investment value.
What triggers NIIT?
Below are the MAGI thresholds that make you subject to NIIT:
- Married filing separately — income over $125k
- Single or Head of Household filers — income over $200k
- Married filing jointly — income over $250k
If you have investment income and your MAGI is less than the above amounts, you will not need to pay NIIT.
What counts as net investment income?
Different types of income may be subject to the 3.8% tax, though not all. Below is a list of common examples of investment income that fall under NIIT:
- Interest and dividends
- Capital gains
- Royalty and rental income
- Business trading income or other such passive income
Additionally, non-qualified annuities may be subject to NIIT. It’s important to consult with a tax professional to determine if an investment you hold is subject to a specific tax.
What is tax-exempt from NIIT?
Several types of income are not subject to NIIT. For example, qualified annuities could be part of a retirement plan, so they may be subject to different tax rules. (For example: 401(k)s, 403(b)s, 457(b)s, and IRAs).
Other types of income generally exempt from NIIT include:
- Wages and unemployment compensation
- Social Security Benefits
- Alimony
- Tax-exempt interest (like municipal bond interest)
- Self-employment income
How to avoid the net investment income tax (NIIT)
Here are a few types of expenses that can help lower your net investment income. Keep in mind that these don't necessarily help you avoid the tax entirely. Rather, the expenses can help reduce your NII, potentially lowering NIIT liability.
- Investment interest expenses
- Investment advisory fees (or brokerage fees)
- Rental and royalty expenses related to your rental and royalty income
- Tax preparation fees
- Fiduciary expenses (for estates and trusts)
- Local income and state taxes
Next, we’ll use an example to demonstrate how investment income may be subject to the net investment income tax.
Net investment income tax example
Note: Keep in mind this is a simple example. Real-world scenarios can typically be more complex.
Example. A single filer has $175k in wages and $80k in dividends (with no expenses). This means their net investment income is $80k. Their MAGI (wages plus dividends) is $255k.
In this case, MAGI exceeds the threshold level for a single filer under NIIT ($200k). This means that the single filer will be subject to the tax.
NIIT will take the lesser of:
- The amount the taxpayer exceeds the threshold ($255k minus $200k = $55k), OR
- Their investment income ($80k)
Since $55k is less than $80k, NIIT will use $55k.
Thus, the taxpayer’s NIIT will be 3.8% multiplied by $55k, resulting in a tax of $2,090.
Does NIIT apply to home sales?
Generally, NIIT does not apply to items normally excluded from your regular taxable income, which includes the sale of a main residence.
If you plan to sell your principal home, the first $250k (single filer) or $500k (married filing joint) is generally exempt from capital gains tax. Hence, it is generally exempt from NIIT. But if the gain on the sale of your home is over the capital gains tax home exclusion limit, you may need to pay tax on the overage, hence, you could pay NIIT if your MAGI exceeds the threshold.
For more information see: Capital Gains Tax on Real Estate and Home Sales.
What is the 3.8% Medicare surtax?
If you are a taxpayer exempt from Medicare taxes, you may still owe NIIT if you meet the investment and MAGI criteria. While you may be subject to the .9% Medicare tax and the 3.8% investment tax, you will not be subject to both on the same type of income.
Note: Though both are surtaxes, they are distinct taxes with different rules. Also, a fun fact: the 'Medicare tax' doesn't currently fund Medicare. It's a separate tax that goes to the general fund.
For more information, see Medicare Tax: Five Things Every Worker Needs to Know.
Net investment income tax 2025: More information
If you'd like to learn more, the IRS has published a list of NIIT FAQs.
Additionally, you can find a withholding estimator on the IRS website that can help you estimate your federal income tax withholding, including NIIT.
Related Content
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Kate is a CPA with experience in audit and technology. As a Tax Writer at Kiplinger, Kate believes that tax and finance news should meet people where they are today, across cultural, educational, and disciplinary backgrounds.
-
I'm 58 and unexpectedly inherited $650K. Does this change my retirement timeline?
We asked an expert financial adviser to weigh in.
-
Why Smart Retirees Are Ditching Traditional Financial Plans
Financial plans based purely on growth, like the 60/40 portfolio, are built for a different era. Today’s retirees need plans based on real-life risks and goals and that feature these four elements.
-
Technology Unleashes the Power of Year-Round Tax-Loss Harvesting
Tech advancements have made it possible to continuously monitor and rebalance portfolios, allowing for harvesting losses throughout the year rather than just once a year.
-
Summer Is Made for Sun, Fun … and Estate Planning Conversations
Now is the time to discuss estate planning with your loved ones to ensure the Great Wealth Transfer is efficient, tax-aware and in line with your legacy goals — not Uncle Sam's.
-
Don't Have an Estate Plan? Six Things That Could Go Very Wrong
Bad things can happen when you're unprepared, such as big-time taxes and family turmoil. Generational planning can help protect the people you love. Here's some expert advice to help you out.
-
The $1 Million Retirement Question: Are You Being Tax-Smart About Your Pension?
A financial planner raises some key considerations for navigating retirement with a pension and recommends four strategies.
-
Divorce and Your Home: An Expert's Guide to Avoiding a Tax Bomb
Your home is probably your biggest asset, so if you're getting a divorce, the stakes are high. Keep it? Sell it? You need to have a good plan in place for how to handle it.
-
Fewer Agents, Fewer Audits: How IRS Staff Cuts Are Changing Enforcement
Significant reductions in the IRS workforce appear to be increasing the number of 'no change' audit closures. The shift could potentially increase the overall tax gap — the difference between taxes that should have been paid and those that were.
-
Trump Tariffs and Taxes: Waiting to See What Happens Is Not a Strategy
Like presidents, tariffs come and go. Policy changes also shift about every two years with the election cycle. If you're paralyzed by uncertainty, you could be missing opportunities to benefit your financial future.
-
Timing Is Everything for Roth Conversions: An Expert's Guide to the Right Strategy
Understanding the nuances of Roth conversions can help you avoid forking over more money in taxes than you need to.