What Is the Net Investment Income Tax and Who Pays It?
Sam's List Editorial | 2026-08-04
What Is the Net Investment Income Tax and Who Pays It? The net investment income tax is a 3.8 percent tax under IRC Section 1411 that applies to the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds a fixed threshold. It is calculated on Form 8960 and sits on vetted of whatever ordinary or capital gains rate already applies to the same income. Two things make it worth understanding rather than discovering. It is a surtax, so it stacks. And the thresholds have never been indexed for inflation, which means more households cross them every year without any change in behavior. The Thresholds, and Why They Keep Catching More People The modified adjusted gross income thresholds are $200,000 for single filers and heads of household, $250,000 for married filing jointly, and $125,000 for married filing separately. Those figures were set when the tax took effect in 2013 and have not moved since. Nearly every other threshold in the code adjusts annually for inflation. This one does not, by design. A household earning $250,000 today is in a materially different position than one earning $250,000 was in 2013, but the tax treats them identically. For most people, modified AGI is the same as adjusted gross income. The modification primarily matters for taxpayers with excluded foreign earned income, which gets added back. The "Lesser Of" Mechanic Is the Part Everyone Gets Backwards This is the single most misunderstood feature. The tax does not apply to all of your investment income once you cross the threshold, and it does not apply to all of your income over the threshold either. It applies to whichever of those two amounts is smaller. Consider a married couple filing jointly with $240,000 in wages and $30,000 in long-term capital gains. Modified AGI is $270,000, which exceeds the $250,000 threshold by $20,000. Net investment income is $30,000. The tax applies to the lesser figure, $20,000, so the additional tax is 3.8 percent of $20,000, or $760. Now the same couple with $150,000 in wages and $30,000 in gains. Modified AGI is $180,000, below the threshold, so no net investment income tax applies at all despite having investment income. And a couple with $400,000 in wages and $5,000 in interest. Modified AGI is $405,000, so the excess over the threshold is $155,000, but net investment income is only $5,000, so the tax applies to $5,000. Wages are never subject to this tax directly. They only matter because they push modified AGI up. What Counts as Net Investment Income, and What Does Not Generally included Generally...
