The Net Investment Income Tax (NIIT) is a 3.8% tax on certain investment income for individuals, estates, and trusts with income above certain levels. Let's dive in to who this applies to:
NIIT for Individuals
For individuals, the NIIT applies if your modified adjusted gross income (MAGI) exceeds certain thresholds. The tax is 3.8% of the lesser of:
Your net investment income
The amount by which your MAGI exceeds these thresholds:
$250,000 if you're married filing jointly or a qualifying surviving spouse
$125,000 if you're married filing separately
$200,000 if you're single or head of household
NIIT for Estates and Trusts
Estates and trusts also need to consider the NIIT. The tax is 3.8% of the lesser of:
The undistributed net investment income
The excess of adjusted gross income over the threshold for the highest tax bracket for estates/trusts (For 2024, this threshold is $15,200. No NIIT if AGI is below that.)
What Counts as Net Investment Income?
Generally, net investment income includes things like:
Interest, dividends, certain annuities, royalties, and rents (unless derived from an active trade or business where NIIT doesn't apply)
Income from a trade or business that's either a passive activity or involves trading financial instruments or commodities. The code that determines passive activity is § 469, and trading in financial instruments or commodities is determined under § 475(e)(2).
Net gains from selling property like stocks, bonds, mutual funds, and real estate (if they're included in your taxable income), excluding property held in an active trade or business
Generally, net gains from selling an active partnership or S corporation ownership interest
It's important to note that NIIT doesn't apply to wages, unemployment compensation, or income from an active business. Also, certain tax-exempt income like municipal bond interest, VA benefits, or the excluded gain from selling your primary home aren't subject to NIIT.
Understanding Modified Adjusted Gross Income (MAGI)
For most individuals, MAGI is the same as your adjusted gross income (AGI). However, if you've excluded any foreign earned income, you'll need to add that back in to calculate your MAGI for NIIT purposes.
How to Report and Pay NIIT
You'll calculate the tax using Form 8960, Net Investment Income Tax—Individuals, Estates, and Trusts.
Individuals: Report the tax on Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR, U.S. Tax Return for Seniors.
Estates and Trusts: Report the tax on Form 1041, U.S. Income Tax Return for Estates and Trusts.
Since NIIT can increase your overall tax liability, consider adjusting your income tax withholding or making estimated tax payments to avoid penalties. Use the Tax Withholding Estimator or refer to Publication 505, Tax Withholding and Estimated Tax for guidance.
Where to Find More Information
Instructions for Form 8960 PDF
Questions and answers on the net investment income tax