The Net Investment Income Tax (NIIT) is a 3.8% surtax that applies to investment income for high earners. Originally enacted as part of the Affordable Care Act, the NIIT has become a permanent feature of the tax code. For 2026, the NIIT thresholds remain at $200,000 for single filers and $250,000 for married filing jointly — thresholds that have never been adjusted for inflation since the tax was introduced in 2013.

Table of Contents

  1. Core Framework: NIIT Explained
  2. 2026 Data: Thresholds and Calculation
  3. Strategies: Minimizing or Eliminating NIIT
  4. Frequently Asked Questions

Core Framework

What Is the Net Investment Income Tax?

The NIIT is a 3.8% tax on the lesser of: (1) Your net investment income for the tax year, or (2) The amount by which your modified adjusted gross income (MAGI) exceeds the NIIT threshold. Investment income includes: interest, dividends, capital gains, rental income, passive activity income, and trade or business income from financial trading activities. It does NOT include: wages, self-employment income, Social Security benefits, tax-free interest, or qualified retirement plan distributions.

The NIIT applies to individuals, estates, and trusts. For individuals, the thresholds are: <strong>Single:</strong> $200,000 MAGI. <strong>Married Filing Jointly:</strong> $250,000 MAGI. <strong>Married Filing Separately:</strong> $125,000 MAGI. <strong>Head of Household:</strong> $200,000 MAGI. These thresholds have not been updated since 2013, meaning the NIIT now affects more taxpayers than ever due to inflation.

NIIT Calculation Example

Here's how the NIIT works in practice: <strong>Example 1 (Single, $250,000 MAGI, $30,000 net investment income):</strong> MAGI exceeds threshold by $50,000 ($250K - $200K). NIIT = 3.8% × lesser of $30,000 (investment income) or $50,000 (MAGI excess). NIIT = 3.8% × $30,000 = $1,140. <strong>Example 2 (Married, $400,000 MAGI, $120,000 net investment income):</strong> MAGI exceeds threshold by $150,000 ($400K - $250K). NIIT = 3.8% × lesser of $120,000 or $150,000. NIIT = 3.8% × $120,000 = $4,560. <strong>Example 3 (Single, $190,000 MAGI, $50,000 net investment income):</strong> MAGI is below the $200K threshold. No NIIT applies, even though investment income is high.

2026 Data & Real Examples

2026 NIIT Thresholds and Income Brackets

For 2026, the NIIT interacts with the federal income tax brackets as follows: <strong>Single Filers:</strong> 3.8% NIIT applies starting at $200,000. The federal tax bracket at this level is 24%. Combined effective rate on investment income: 24% (federal) + 3.8% (NIIT) = 27.8% for short-term gains/ordinary investment income, or 15% (LTCG) + 3.8% = 18.8% for long-term gains. <strong>Married Filing Jointly:</strong> 3.8% NIIT starts at $250,000. Federal bracket: 24%. Combined: 27.8% for short-term, 18.8% for long-term. For high earners in the 35% or 37% brackets, the combined rate reaches 38.8% or 40.8% on investment income.

Let's calculate the total NIIT paid by different investor profiles in 2026: <strong>Case 1 (Single, $220K wage income, $50K investment income):</strong> MAGI: $270K. Excess above $200K: $70K. Investment income: $50K. NIIT: 3.8% × $50K = $1,900. Federal tax on investment income: $9,000 (short-term at 24%). Total tax on investment income: $10,900 (27.8% effective). <strong>Case 2 (Married, $300K wage income, $100K investment income):</strong> MAGI: $400K. Excess above $250K: $150K. Investment income: $100K. NIIT: 3.8% × $100K = $3,800. Federal tax on investment income: $23,800 (short-term at 37%). Total tax: $27,600 (40.8% effective).

NIIT Impact on Different Investment Types

The NIIT affects different investment types differently in 2026: <strong>Taxable Bond Interest:</strong> Fully subject to NIIT (in addition to federal income tax at ordinary rates). Combined rate: 27.8-40.8%. <strong>Qualified Dividends:</strong> Subject to NIIT + LTCG rates. Combined: 18.8-23.8%. <strong>Non-Qualified Dividends:</strong> Subject to NIIT + ordinary rates. Combined: 27.8-40.8%. <strong>Long-Term Capital Gains:</strong> Subject to NIIT + LTCG rates. Combined: 18.8-23.8%. <strong>Short-Term Capital Gains:</strong> Subject to NIIT + ordinary rates. Combined: 27.8-40.8%. <strong>Tax-Exempt Bond Interest:</strong> NOT subject to NIIT or federal income tax. This is the only investment income exempt from NIIT.

Strategies

Here are the strategies for minimizing or eliminating the NIIT in 2026:

  • <strong>Maximize tax-advantaged accounts.</strong> Contributions to 401k, IRA, HSA, and 529 plans reduce your MAGI, potentially bringing it below the NIIT threshold. For a single filer at $220K MAGI, maxing out a $23.5K 401k reduces MAGI to $196.5K — below the $200K NIIT threshold, eliminating the NIIT entirely.
  • <strong>Use tax-advantaged accounts for tax-inefficient investments.</strong> Place bonds, REITs, and high-turnover active funds in tax-advantaged accounts (IRA, 401k, HSA) to avoid generating investment income subject to NIIT. These investments generate interest or non-qualified dividends that are taxed at ordinary rates + NIIT — placing them in tax-advantaged accounts eliminates both taxes.
  • <strong>Hold tax-efficient investments in taxable accounts.</strong> Hold low-turnover index funds, individual stocks held long-term, and tax-managed funds in taxable accounts. These generate minimal capital gains distributions and qualified dividends (taxed at lower rates + NIIT), reducing the net investment income subject to NIIT.
  • <strong>Invest in tax-exempt municipal bonds.</strong> Tax-exempt municipal bond interest is exempt from both federal income tax and the NIIT. For high earners in the 35%+ bracket, tax-exempt bonds yielding 4-5% are comparable to taxable bonds yielding 6-7% after accounting for NIIT and federal tax. Municipal bonds are especially attractive for investors who have maxed out tax-advantaged accounts.
  • <strong>Manage MAGI to stay below the NIIT threshold.</strong> Strategies to reduce MAGI include: max pre-tax 401k contributions, max HSA contributions ($4,300 single / $8,550 family), max traditional IRA deductions, defer self-employment income, accelerate deductible expenses, and contribute to a health FSA ($3,200 in 2026). Each dollar of MAGI reduced below the NIIT threshold saves 3.8 cents in NIIT.
  • <strong>Use Roth conversions strategically.</strong> Roth conversions increase your MAGI in the year of conversion, potentially triggering NIIT. However, converting during a year when your MAGI is already below or near the NIIT threshold can be more tax-efficient. In 2026 with favorable tax brackets, some high earners may want to convert to Roth before tax rates (and NIIT thresholds) potentially increase.

Model your NIIT exposure with our retirement calculator and investment calculator. For tax-advantaged vehicle comparison, read our tax-efficient investment vehicles guide.

Frequently Asked Questions

Net Investment Income Tax: FAQ

<strong>What income is NOT subject to NIIT?</strong>

The following income types are exempt from NIIT: wages, self-employment income (FICA/SECA tax already applies), Social Security benefits, tax-exempt municipal bond interest, qualified retirement plan distributions (401k, IRA, pension), life insurance proceeds, gifts and inheritances, and veteran's benefits.

<strong>Is the NIIT a permanent tax?</strong>

Yes — the NIIT is now a permanent feature of the tax code. Enacted in 2013 as part of the Affordable Care Act, it was made permanent by subsequent legislation. The 3.8% rate and the $200K/$250K thresholds have never been adjusted for inflation, meaning the NIIT affects more taxpayers each year as incomes grow.

<strong>Can I deduct the NIIT on my tax return?</strong>

No — the NIIT is not deductible for federal income tax purposes. It's a separate payroll-style tax calculated on Form 8960. However, the NIIT is deductible for self-employment tax purposes (if you're self-employed) and may be deductible for state tax purposes in some states.

<strong>Do state taxes affect the NIIT?</strong>

No — the NIIT is a federal tax only. State taxes do not credit against the NIIT, and the NIIT does not reduce state taxable income. However, some states (like California and New York) have their own versions of investment income surtaxes that apply in addition to the federal NIIT. Residents of these states face combined federal + state investment tax rates of 40-50%.

<strong>Can NIIT be triggered by passive income?</strong>

Yes — passive income from rental properties, limited partnerships, or other passive activities is subject to the NIIT. However, rental income from a property where you materially participate (active rental income) is NOT subject to NIIT. This distinction is important for real estate investors — active participation can avoid the 3.8% NIIT on rental income.

<strong>How does the NIIT affect my retirement planning?</strong>

The NIIT adds 3.8% to the tax rate on investment income, making tax-advantaged accounts (especially Roth accounts) more valuable. Since qualified retirement plan distributions are NOT subject to NIIT, using pre-tax 401k/IRA accounts for retirement income can avoid the NIIT. However, Roth accounts are still superior for tax diversification since they provide tax-free income without any NIIT or income tax.

Bottom Line

The 2026 Net Investment Income Tax adds a 3.8% surtax on investment income for high earners, with thresholds ($200K single / $250K married) that have never been adjusted for inflation. The good news: there are proven strategies to minimize or eliminate the NIIT, including maxing out tax-advantaged accounts (which reduce MAGI below the threshold), placing tax-inefficient investments in tax-advantaged accounts, and investing in tax-exempt municipal bonds. By implementing these strategies, high earners can save $1,000-$5,000 annually in NIIT — money that compounds to significant additional wealth over time.

We encourage you to model your NIIT exposure using our retirement calculator and investment calculator. For more on tax-efficient strategies, browse our blog.

Disclaimer: The content provided in this article is for informational purposes only and does not constitute financial, legal, or tax advice. Every investor's situation is unique, and the strategies discussed may not be suitable for all individuals. Past performance does not guarantee future results, and all investments carry risk, including the potential loss of principal. Always consult with a qualified financial advisor, tax professional, or attorney before making investment decisions. CompoundFig provides tools and educational content but is not a registered investment advisor. The information contained herein is based on publicly available data and CompoundFig's analysis, which may not be accurate, complete, or up-to-date. You are solely responsible for your investment decisions and should verify all information with independent sources before acting on it.