What's net investment income—and how is it taxed?

 

As an investor, you may owe an additional 3.8% tax called net investment income tax (NIIT). But you'll only owe it if you have investment income and your modified adjusted gross income (MAGI) goes over a certain amount.

 
 

What counts as net investment income?

If you have income in the first column below, you could be subject to the tax, depending on your MAGI.

  • Net investment income includes:

    • Capital gains (short- and long-term)  
    • Dividends (qualified and nonqualified)
    • Taxable interest
    • Rental and royalty income
    • Passive income from investments you don't actively participate in 
    • Business income from trading financial instruments or commodities
    • Taxable portion of nonqualified annuity payments

  • It doesn’t include:

    • Wages
    • Veterans’ or Social Security benefits
    • Unemployment pay
    • Qualified retirement plan withdrawals (like those from a 401(k) or IRA)
    • Payouts from a traditional defined benefit pension plan or retirement plan annuity 
    • Payouts from a deferred compensation plan from a state, local government, or tax-exempt organization
    • Tax-exempt interest from municipal bonds or funds
    • Tax-exempt income from the sale of your primary home 
    • Life insurance proceeds
    • Income from a business you actively participate in 

Is your MAGI greater than the threshold?

The IRS uses the term modified adjusted gross income (MAGI) in various ways. For the purposes of net investment income, your MAGI is your adjusted gross income (AGI) Tooltip  with adjustments for certain foreign deductions or income. If you don’t have foreign income or deductions, your AGI and MAGI may be the same.  

Is your MAGI greater than the threshold?

Filing status  MAGI threshold 
Single  $200,000
Married filing jointly $250,000
Married filing separately  $125,000

For more help determining your MAGI and net investment income tax liability, talk to a tax professional Tooltip or search for Form 8960 at www.IRS.gov.

How much could you owe?

If you have investment income and go over the MAGI threshold, the 3.8% tax will apply to your net investment income or the portion of your MAGI that goes over the threshold—whichever is less.

Here are two examples:

Example 1:

Your net investment income is less than your MAGI overage. 

Let's say you have $30,000 in net investment income and your MAGI goes over the threshold by $50,000. You'll owe the 3.8% tax. But you'll only owe it on the $30,000 of investment income you have—since it's less than your MAGI overage. 

Your additional tax would be $1,140 (.038 x $30,000).

Example 2:

Your MAGI overage is less than your net investment income. 

Let's say you have $30,000 in net investment income, but your MAGI only goes over the threshold by $15,000. Again, you'll owe the 3.8% tax. But in this case, you'll owe it on the $15,000 MAGI overage—since it's less than your net investment income. 

Your additional tax would be $570 (.038 x $15,000).

What you can do next