IRC 1411: Net Investment Income Tax, MAGI, and Thresholds

The Net Investment Income Tax is a 3.8% federal tax on investment income owed by individuals, estates, and trusts whose income exceeds set thresholds. For individuals, you owe it only if two things are true at once: you have net investment income, and your modified adjusted gross income (MAGI) is above the threshold for your filing status. Those thresholds are $250,000 for married filing jointly or a qualifying surviving spouse, $200,000 for single or head of household, and $125,000 for married filing separately.¹ The dollar amounts are written into the statute and are not indexed for inflation, so they have stayed the same since the tax took effect in 2013.

If your MAGI is below your threshold, the tax does not apply no matter how much investment income you have. If your MAGI is above the threshold but you have no net investment income, it also does not apply. Both pieces have to be present.

How MAGI Is Defined Here

For most people, MAGI under Section 1411 is the same number as adjusted gross income. The only common adjustment is for taxpayers who claim the foreign earned income exclusion under Section 911: the excluded foreign wages get added back for this calculation.²

What Counts as Net Investment Income

Net investment income is your gross investment income minus deductions properly allocable to it. Gross investment income covers:

Interest and dividends from bank accounts, bonds, stocks, and mutual funds
Capital gains from selling stocks, bonds, mutual funds, real estate other than excluded gain on a primary residence, and other property
Rental and royalty income, whether from real property, intellectual property, or natural resources
The taxable portion of non-qualified annuity payments
Your share of income from a trade or business in which you do not materially participate
Income from a business that trades financial instruments or commodities, regardless of your participation level

The “net” side matters. You can reduce gross investment income by investment interest expense, advisory and brokerage fees, expenses tied to rental and royalty income, and the portion of state and local income taxes allocable to investment income.¹ Estates and trusts can also deduct fiduciary expenses. Tracking those expenses carefully can meaningfully reduce the tax.

What Is Excluded

Wages, salaries, and self-employment income are not investment income. Congress excluded self-employment earnings because they are already subject to Medicare tax. Income from a trade or business in which you materially participate is also excluded, which is why the material participation question matters so much for business owners: participate, and the income falls out of the NIIT; don’t, and it falls in.

Distributions from qualified retirement plans, including 401(k)s, 403(b)s, traditional and Roth IRAs, and 457(b) plans, are excluded.¹ They may still be subject to regular income tax, but they do not feed the NIIT calculation. Tax-exempt municipal bond interest, Social Security benefits, unemployment compensation, and Alaska Permanent Fund dividends are also excluded.

One exclusion catches people selling a house. Gain that is excluded from gross income under another provision of the tax code is also excluded from the NIIT. The most common example is the Section 121 exclusion on a primary residence: the first $250,000 of gain, or $500,000 for a married couple filing jointly, is out of gross income and out of the NIIT.¹ Only gain above that exclusion flows into net investment income.

Rental income is a different story. It is treated as passive by default, so it typically counts as net investment income. Taxpayers who qualify as real estate professionals under Section 469(c)(7) and who also materially participate in their rental activities can treat the income as non-passive and keep it out.

How the Tax Is Calculated

The tax is 3.8% of whichever amount is smaller: your net investment income, or the amount by which your MAGI exceeds your filing-status threshold.² That “lesser of” rule keeps the tax from ever being applied to more excess MAGI than you actually have in investment income, or vice versa.

A single filer with $275,000 of MAGI, $100,000 of which is net investment income, is $75,000 above the $200,000 threshold. Since $75,000 is less than $100,000, the tax applies to $75,000. That is $75,000 × 3.8% = $2,850.

Change the facts so the same filer has $275,000 of MAGI but only $50,000 of net investment income. Now the smaller number is the $50,000 of investment income, so the tax applies to that. It comes to $50,000 × 3.8% = $1,900.

You report the calculation on IRS Form 8960 and attach it to your annual return. You only file the form if you actually owe the tax; if your MAGI is below your threshold or your net investment income is zero, the form is not required.³

Estates and Trusts

Estates and trusts owe the same 3.8% but face a much lower bar. The tax applies to undistributed net investment income when the entity’s adjusted gross income exceeds the dollar figure at which the highest tax bracket begins for the year. For 2026, the 37% bracket for estates and trusts starts at $16,000.⁴ Distributing income to beneficiaries shifts the tax question to the beneficiary level.

Estimated Tax Payments

The NIIT is part of your total federal tax liability, so it belongs in your quarterly estimated tax planning. If withholding and credits do not cover it, you can end up with an underpayment penalty. Form 2210, which calculates that penalty, treats the NIIT as a component of current-year tax.⁵

The mismatch tends to hit in years with a spike in investment income: selling a business, unwinding a large stock position, or receiving a big capital gain distribution. Running the numbers before the event and adjusting your estimated payments avoids a penalty on top of an already large bill.

Nonresident Aliens and Dual-Status Filers

The tax does not apply to nonresident aliens. The statute limits it to U.S. citizens and residents.² Dual-resident taxpayers who claim treaty benefits as nonresidents of the United States are treated as nonresident aliens for this purpose and are also exempt.

Dual-status individuals who are U.S. residents for only part of the year owe the NIIT only for the portion of the year they are U.S. residents. The threshold amount is not prorated. A dual-status single filer still gets the full $200,000 threshold even if the residency period covered only part of the year.¹

1
Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
2
Office of the Law Revision Counsel. 26 US Code 1411 – Imposition of Tax
3
Internal Revenue Service. About Form 8960, Net Investment Income Tax
4
Internal Revenue Service. Rev Proc 2025-32
5
Internal Revenue Service. Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts