The definition, precisely
IRC §1411 imposes 3.8% on the lesser of net investment income or MAGI above the threshold: $200,000 single and head of household, $250,000 joint, $125,000 married filing separately. Investment income means the passive basket — interest, dividends, annuities, rents, royalties, capital gains, and passive-activity income — net of allocable deductions. Excluded from the base: wages, active trade-or-business income, distributions from qualified retirement plans, Social Security, and tax-exempt interest. The thresholds are statutory and unindexed, so inflation quietly expands the tax every year.
How the NIIT actually works
The computation has two gates and the smaller number wins: compute net investment income, compute MAGI-over-threshold, multiply the lesser by 3.8%. A joint couple with $300,000 MAGI and $20,000 of dividends pays on the $20,000 ($760); the same couple with $260,000 MAGI and $100,000 of gains pays on the $10,000 excess ($380). Real estate professionals escape on their rental income by clearing material participation; everyone else with rents above the line pays. Estimated payments must cover it — the safe harbors count total tax, NIIT included.
The fine print
Three edges cut people. Trusts hit the top NIIT threshold at barely $15,000 of undistributed income — distribute or pay. The §121 home exclusion shelters gain before NIIT ever sees it, but gain above the exclusion stacks straight into the surtax. And Roth conversions inflate the MAGI that triggers NIIT on otherwise-untouched investment income — model the conversion and the surtax together, or the Roth math lies.
Frequently Asked Questions
- Interest, dividends, capital gains, rental and royalty income, and passive business income — minus properly allocable deductions. Wages, active S-corp income, Social Security, and tax-exempt interest are outside it entirely.
- $200,000 MAGI single or head of household, $250,000 joint, $125,000 married filing separately — fixed by statute, never indexed. Bracket creep pulls more households over the line every year.
- Only the taxable slice: the §121 exclusion ($250,000/$500,000) comes off first, and only gain above it — when MAGI also exceeds the threshold — faces the 3.8%. Most home sales never touch it.
- Shift MAGI under the threshold (HSA funding, retirement contributions, installment timing), harvest losses against gains, favor municipal bonds, and time large sales across tax years. The threshold is a cliff — a dollar over costs 3.8% on the investment slice.