Net Investment Income Taxes (NIIT): 2026 Guide

Key Takeaways:

• Net investment income tax (NIIT) is a 3.8% surtax on net investment income for individuals, estates, and trusts whose modified adjusted gross income (MAGI) exceeds IRS thresholds.
• In 2026, the MAGI thresholds are: Single - $200,000, Married Filing Jointly - $250,000, Married Filing Separately - $125,000, and Estates & Trusts - $16,000 AGI.
• Qualifying investment income includes capital gains, dividends, interest, rental income, royalties, and passive business income.
• Strategies to reduce NIIT include maximizing retirement contributions, tax-loss harvesting, asset location, and charitable giving.
• NIIT is reported on IRS Form 8960, filed with your federal tax return.

What is the Net Investment Income Tax (NIIT)?

The Net Investment Income Tax (NIIT) is a surtax on net investment income (NII). It applies to individuals, estates, and trusts whose modified adjusted gross income (MAGI) exceeds certain IRS thresholds. The tax rate is currently at 3.8% in 2026.

The NIIT is not a replacement for income tax, but an additional layer on top of it. The tax applies to the lesser of either your total net investment income or the amount MAGI exceeds the IRS thresholds.

Why More Taxpayers Are Paying It Each Year

The MAGI thresholds for individuals have not been adjusted for inflation since the NIIT’s creation in 2013. The number of taxpayers subject to NIIT grew from 3.1 million in 2013 to 7.3 million in 2021. Total NIIT payments grew from $16.5 billion to $59.8 billion over the same period.

With wages and investment values rising, awareness and tax planning have never been more important.

2026 NIIT Thresholds – Who Has to Pay?

The NIIT applies if your MAGI exceeds your filing status threshold, and you have net investment income. If you have no investment income, you are not liable for NIIT, even if your MAGI is above the threshold.

NIIT Thresholds for Individuals (2025 & 2026)

Note: These thresholds are not indexed to inflation and have remained unchanged since 2013.

NIIT Thresholds for Estates and Trusts

Estates and trusts are subject to NIIT if they have undistributed net investment income and their adjusted gross income (AGI) exceeds the top tax bracket threshold. In 2026, the AGI threshold is $16,000.

Some trusts are exempt from NIIT, including charitable trusts, grantor trusts, and perpetual care trusts.

Distributing investment income to beneficiaries who are below the threshold can reduce estate/trust NIIT liability.

What Counts as Net Investment Income?

NII includes most forms of passive or unearned income from investments.

Income That Is Subject to NII

• Capital gains (short and long-term)
• Qualified and non-qualified dividends
• Taxable interest
• Rental and royalty income
• Passive business income
• Business income from trading financial instruments or commodities
• Taxable portion of non-qualified annuity distributions
• Non-excluded gains from the sale of real property

Income That Is Not Subject to NIIT

• Wages and self-employment income
• Social Security and Veterans’ benefits
• Unemployment compensation
• Qualified retirement plan distributions (401 (k), IRA, 403 (b))
• Tax-exempt interest (e.g., municipal bonds)
• Excluded gains from sale of primary residence
• Life insurance proceeds
• Alimony from pre-2019 divorce agreements
• Income from a business you actively participate in (500+ hours per year)
• Inheritance and gifts

A note on active business participation: If you earn passive income from a business, actively increasing your involvement to more than 500 hours per year may reclassify that income as non-passive, removing it from NIIT scope.

How to Calculate Your NIIT – Two Worked Examples

Calculating your NIIT takes just a few steps. The tax always applies to the lesser of your NII or your MAGI overage above the threshold.

Step-by-Step NIIT Calculation

1. Determine your MAGI: Compare your MAGI to your filing status threshold. If you’re under the threshold, stop; you do not owe NIIT.
2. Calculate your Net Investment Income (NII): Add all qualifying investment income and subtract eligible deductions (rental property expenses, investment advisory fees, etc.).
3. Find the lesser amount: Compare your NII to the amount your MAGI exceeds the threshold. The NIIT applies to whichever is smaller.
4. Apply the 3.8% rate: Multiply the lesser amount by 0.038.
5. Report on IRS Form 8960.

How to Report NIIT: IRS Form 8960

The NIIT is reported on IRS Form 8960: Net Investment Income Tax – Individuals, Estates, and Trusts. If you do not owe NIIT, you do not need to file Form 8960.

Form 8960 Filing Steps

1. Using Form 8960, tally all taxable investment income.
2. Subtract allowable deductions (rental expenses, state/local taxes attributable to NII, etc.).
3. Determine which is smaller: your NII or the MAGI overage.
4. Enter the smaller amount on Line 20 of Form 8960.
5. Multiply by 0.038 to calculate your NIIT.
6. Report the resulting tax on Line 17 of Schedule 2 (which flows to your Form 1040).
7. Attach Form 8960 to your federal tax return.
   1. Note: Most tax software handles this automatically; a qualified tax professional can ensure accuracy.

Is the NIIT Going Away? What Investors Need to Know in 2026

As of this article’s publication date, the NIIT remains in effect. It has been a subject of legislative discussion, and some proposals have called for its repeal or modification, but Congress has not enacted any changes.

The One Big Beautiful Bill Act and tax reform proposals should be monitored by investors with significant investment income. Whether or not legislation changes, proactive planning now remains essential.

Strategies to Reduce Your Net Investment Income Tax

There are two primary levers for reducing your NIIT: lowering your MAGI and reducing your net investment income. The most effective plans use both.

Strategies to Lower Your MAGI

• Maximize pre-tax retirement contributions: 401(k), 403(b), and traditional IRA contributions reduce taxable income and MAGI directly. For 2026 contribution limits, refer to the IRS.
• Contribute to a Health Savings Account (HSA): HSA contributions are tax-deductible and reduce MAGI. They also offer triple tax benefits: deductible contributions, tax-free growth, and qualified tax-free withdrawals.
• Roth conversion timing: Qualified distributions from Roth IRAs are excluded from MAGI, making Roth accounts a powerful long-term NIIT reduction. However, Roth conversions increase MAGI in the year they’re done, so timing is critical.
• Defer income strategically: If you expect a high-income year (bonus, large capital event), consider deferring income or bonuses to a lower-income year.
• Qualified Charitable Distributions (QCDs): Retirees over 70 ½ who don’t need their RMDs can direct up to $105,000 per year (2026 limit) from their IRA directly to a qualified charity as a QCD. This satisfies the RMD requirement without the amount appearing in MAGI.
• Invest in municipal bonds: Interest from municipal bonds is excluded from MAGI for NIIT purposes
• Real estate installment sales: Spreading real estate sale proceeds over multiple years can keep your MAGI below NIIT thresholds.

Strategies to Reduce Your Net Investment Income

• Tax-loss harvesting: Offset capital gains by realizing losses on underperforming investments, which reduces NII.
• Asset location optimization: Hold income-producing assets (dividend stocks, bonds) in tax-deferred accounts where income is not immediately subject to NIIT.
• Tax-gain harvesting in low-income years: Strategically realize more capital gains in years your MAGI is below the threshold to reduce future NII burden.
• Charitable Remainder Trusts (CRTs): CRTs are exempt from NIIT, allowing appreciated assets to generate income tax-efficiently while supporting charitable goals.
• Gift appreciated assets: Instead of selling appreciated securities and donating the proceeds, gift the securities directly to charity or to family members in lower tax brackets who may be below the NIIT threshold.
• 1031 exchanges: Reinvesting proceeds from investment property sales into a like-kind property defers NIIT exposure. As this is a complex strategy, consult a real estate attorney or tax advisor.
• Business participation: Increasing active involvement in a passive business above 500 hours/year may reclassify passive income as non-passive, removing it from NIIT scope.

Special Considerations for High-Income Earners and Retirees

Retirees and Investment Income in Retirement

RMDs increase MAGI, which can trigger NIIT, so withdrawal strategies should be coordinated. While Social Security is excluded from NII, it increases your overall MAGI, which can pull more investment income into the NIIT range.

Qualified Charitable Distributions can be particularly useful for retirees wanting to decrease their NIIT risk.

Business Owners and Pass-Through Income

Passive income from S-corps or partnerships you don’t materially participate in is subject to NITT. Optimizing business expenses and considering active participation can help reduce NIIT liability.

Real Estate Investors

Rental income is subject to NIIT unless you are a real estate professional. 1031 exchanges and installment sales can be helpful strategies to reduce MAGI and NII.

Why Work with a Financial Advisor for NIIT Planning?

NIIT planning requires coordinating tax strategy, investment management, estate planning, and charitable giving simultaneously.

A Wealth Enhancement advisor can:

• Identify your current and projected NIIT exposure
• Optimize asset location and the timing of income events
• Model Roth conversion scenarios
• Evaluate CRTs, QCDs, or gifting strategies
• Monitor legislative changes that may affect your plan

Questions to Ask Your Advisor

When discussing NIIT planning with an advisor, consider asking:

• What is my estimated NIIT exposure this year and next year?
• Should I be doing Roth conversions to reduce future MAGI?
• Am I making the most of my HSA and retirement contributions?
• Does my estate plan account for the NIIT threshold for trusts?
• Is my real estate strategy structured to minimize NIIT?

Ready to Reduce Your NIIT Exposure?

The net investment income tax can take a meaningful bite out of investment returns, but with the right planning, you can reduce or even eliminate its impact. An advisor at Wealth Enhancement can review your full financial picture and help you build a tax-efficient strategy tailored to your goals.

If you’re curious how to minimize your net investment income tax, schedule a meeting with a specialist at Wealth Enhancement today.

Frequently Asked Questions About Net Investment Income Tax (NIIT)

What Is a Net Investment Income Tax (NIIT)?

The NIIT is an additional 3.8% federal surtax imposed under IRC Section 1411 on certain types of investment income for high-income individuals, estates, and trusts. It applies to the lesser of your net investment income or the amount your MAGI exceeds the IRS income threshold for your filing status.

Who Pays the NIIT?

The NIIT applies to individuals who have net investment income and whose MAGI exceeds the IRS thresholds. Estates and trusts are subject to NIIT if they have undistributed net investment income and their AGI exceeds $16,000.

What Are the 2026 NIIT Thresholds?

In 2026, the MAGI threshold is $200,000 for single or head of household individuals, $250,000 for married couples filing jointly, and $125,000 for married couples filing separately. The estate and trust threshold is $16,000 in 2026, up from $15,650 in 2025.

What Types of Income Are Subject to NIIT?

Net investment income includes capital gains, dividends, taxable interest, rental income, royalties, passive business income, and the taxable portion of non-qualified annuity distributions.

What Types of Income Are Not Subject to NIIT?

Wages, self-employment income, Social Security benefits, qualified retirement plan distributions, tax-exempt interest, alimony, unemployment benefits, and excluded gains from the sale of your primary residence are all excluded from NIIT.

How Do I Calculate My NIIT?

Apply 3.8% to the lesser of your total net investment income or the amount your MAGI exceeds your threshold. File using IRS Form 8960.

Is the NIIT Being Repealed or Changed in 2026?

As of July 2026, no. The NIIT remains in effect at 3.8%. While legislative proposals have periodically called for repeal or modification, no changes have been enacted.

What Is IRS Form 8960?

Form 8960 is the IRS form used to calculate and report the Net Investment Income Tax. You attach it to your federal Form 1040 if you owe NIIT.

What Strategies Can Reduce My NIIT?

Strategies include maximizing pre-tax retirement contributions, funding an HSA, tax-loss harvesting, carefully timed Roth conversions, investing in municipal bonds, utilizing CRTs and QCDs, and implementing real estate strategies such as 1031 exchanges and installment sales.

How Can a Wealth Enhancement Advisor Help With NIIT Planning?

A Wealth Enhancement advisor can assess your NIIT exposure across your full financial picture, including investments, retirement accounts, real estate, and estate planning. Advisors can help develop a coordinated strategy to reduce your NIIT liability.

This information is not intended to provide individualized tax or legal advice. Discuss your specific situation with a qualified tax or legal professional.

Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes, and potential illiquidity. Investing involves risk, including possible loss of principal.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA. 

This article was originally published on 12/23/2025 and has been updated.

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