Concise Takeaway
NIIT is a 3.8% tax on net investment income for individuals, estates, and certain trusts whose modified AGI exceeds statutory thresholds.
Who NIIT Applies To
NIIT applies to:
- U.S. citizens
- U.S. residents
- Estates and certain trusts
NIIT does not apply to nonresident alien individuals.
Taxpayers compute NIIT using Form 8960.
What Counts as Investment Income
Investment income generally includes:
- Interest
- Dividends
- Capital gains
- Rental income
- Royalty income
- Non‑qualified annuities
- Income from trading financial instruments or commodities
- Income from passive activities under Section 469
Taxpayers may subtract expenses properly allocable to investment income.
What Is Not Investment Income
Net investment income does not include:
- Distributions from qualified retirement plans
- 401(a), 403(a), 403(b), 457(b)
- Traditional IRAs
- Roth IRAs
However, these distributions do increase modified AGI, which may push a taxpayer above the NIIT threshold.
Income excluded from gross income for regular tax purposes is also excluded from NIIT. Example: Section 121 exclusion for gain on the sale of a principal residence.
NIIT Threshold Amounts
NIIT applies when modified AGI exceeds:
|
Filing Status |
Threshold |
|
Married filing jointly / Qualifying surviving spouse |
$250,000 |
|
Single / Head of household |
$200,000 |
|
Married filing separately |
$125,000 |
These thresholds are not indexed for inflation.
How NIIT Is Calculated
NIIT is 3.8% of the lesser of:
- Net investment income, or
- Modified AGI minus the threshold for the filing status
This “lesser‑of” rule prevents NIIT from taxing more investment income than exists and ensures NIIT applies only to income above the threshold.
Illustrative Example
A single taxpayer has:
- $180,000 wages
- $90,000 passive partnership income (investment income)
- Modified AGI = $270,000
Threshold for single filers: $200,000
Excess modified AGI: $270,000 − $200,000 = $70,000
Net investment income: $90,000
NIIT applies to the lesser of:
- $70,000 (excess modified AGI)
- $90,000 (net investment income)
NIIT = 3.8% × $70,000 = $2,660
NIIT Flow Summary
- Determine modified AGI
- Compare with threshold
- Compute net investment income
- Apply 3.8% to the lesser of:
- Net investment income
- Modified AGI minus threshold
- Report NIIT on Form 8960