What is the net investment income tax (NIIT)?

NIIT generally applies once MAGI exceeds $200,000 for single or head of household filers, $250,000 for married couples filing jointly or a qualifying surviving spouse, or $125,000 for married individuals filing separately, under IRC Section 1411. These thresholds are set by statute and are not indexed for inflation (see IRS Topic 559 and the IRS's net investment income tax guidance). The tax applies to the lesser of your net investment income or the amount your MAGI exceeds the threshold.

Net investment income includes interest, dividends, capital gains, rental and royalty income, and income from businesses considered passive activities. Wages, self-employment income, and distributions from most retirement accounts are generally excluded.

Because NIIT stacks on top of ordinary income tax and, where applicable, the net capital-gains rate, a single large event, such as selling a concentrated stock position or completing a sizable Roth conversion, could push a household over the threshold and add 3.8% to that year's investment income.

California note: California does not conform to the federal NIIT, and the state imposes no net investment income tax of its own, so California residents who owe the federal 3.8% surtax face no separate state-level equivalent, though standard California income tax still applies to the same investment income and the federal NIIT is generally not deductible on a California return (see the California Franchise Tax Board's conformity guidance).

Retirees with large pre-tax retirement accounts may see required minimum distributions push their MAGI above the NIIT threshold in a given year. Coordinating the timing of capital gains, Roth conversions, and charitable giving, potentially alongside tax-loss harvesting, across years could help some households manage or reduce NIIT exposure, though the right approach depends on the full tax picture.