The net investment income tax (NIIT) is a 3.8% US federal surtax on investment income — capital gains, dividends, interest, rents, and royalties — owed by individuals whose modified adjusted gross income exceeds $200,000, or $250,000 for married couples filing jointly.
In plain terms
It is the reason the top federal rate on long-term capital gains is 23.8%, not the advertised 20%. Enacted in 2010 to help fund the Affordable Care Act and effective since 2013, the NIIT sits on top of the regular income tax and applies only to investment income — wages and self-employment earnings are never subject to it. But the thresholds were never indexed to inflation, so a tax aimed at the top few percent in 2013 now reaches a steadily widening slice of ordinary two-income households.
How it works
The tax, codified at Section 1411 of the tax code, applies 3.8% to the lesser of two amounts: net investment income, or the excess of modified adjusted gross income over the threshold. A couple with $260,000 of MAGI and $50,000 of dividends pays 3.8% on $10,000 — the excess — not on the full $50,000. Net investment income covers gains, dividends, interest, rents, royalties, and income from businesses in which the taxpayer does not materially participate; it excludes wages, distributions from 401(k)s and IRAs, municipal bond interest, and active business income, per the IRS’s Topic 559.
The interaction is the trap: income that is itself exempt still raises MAGI. A large Roth conversion, a year-end bonus, or an IRA distribution can push a household over the threshold and drag investment income that would otherwise have escaped into the 3.8% net. Home sales reach it too — gain above the $250,000/$500,000 home-sale exclusion is investment income. Trusts and estates hit the tax at the top-bracket threshold of just $16,000 (2026), which is one reason trustees distribute income out to beneficiaries taxed at their own, higher thresholds.
The numbers
- Rate: 3.8%, unchanged since the tax took effect in 2013.
- MAGI thresholds: $200,000 single or head of household; $250,000 married filing jointly; $125,000 married filing separately — fixed by statute since 2013, never indexed for inflation.
- Trusts and estates, 2026: the surtax starts at $16,000 of undistributed income — 1/15th of the single-filer threshold.
- Combined top federal rate on long-term gains, 2026: 23.8% (20% + 3.8%), before state tax.
- Home sales: only gain above the $250,000 (single) / $500,000 (joint) exclusion counts.
What people get wrong
That earning wages keeps you safe from it. Wages are never net investment income, but they count fully toward MAGI — so a $300,000 salary means every dollar of a couple’s dividends and realized gains is exposed to the 3.8%, while a retiree with the same dividends and $200,000 of MAGI pays nothing on them. The threshold is a cliff for the income mix, not the income type. The frozen thresholds compound this: $250,000 in 2013 dollars is well over $340,000 today, so each year of inflation quietly converts more households into NIIT payers without any law changing — a design the Congressional Research Service notes has substantially broadened the tax’s reach since enactment.
Related
Read more: Taxes: How Wealth Is Structured and Preserved · Money Management: From Wealth Manager to Family Office · Equity Compensation: RSUs, ISOs, and the Tech Wealth Engine
See also: Step-up in basis · Tax-loss harvesting · Carried interest · Buy, borrow, die