Topic 559 - Net Investment Income Tax

In tax years beginning in 2013 and later, a 3.8 percent Net Investment Income Tax (NIIT) applies to individuals, estates and trusts that have net investment income above applicable threshold amounts.

Individuals

The NIIT applies in the case of an individual, at a rate of 3.8 percent on the lesser of:

  • the net investment income, or
  • the excess of modified adjusted gross income over the following threshold amounts:
    • $250,000 for married filing jointly or qualifying widow(er) with dependent child
    • $125,000 for married filing separately
    • $200,000 in all other cases

Estates & Trusts

In the case of an estate or trust, the new tax of 3.8 percent applies on the lesser of:

  • (A) the undistributed net investment income, or
  • (B) the excess (if any) of:
    • the adjusted gross income over the dollar amount at which the highest tax bracket begins for an estate or trust for the tax year. (For estates and trusts, the 2014 threshold is $12,150)

Definition of Net Investment Income and Modified Adjusted Gross Income

In general, net investment income for purpose of this tax, includes but is not limited to:

  • interest, dividends, certain annuities, royalties, and rents (unless derived in a trade or business in which the NIIT does not apply),
  • income derived in a trade or business which is a passive activity or trading in financial instruments or commodities, and
  • net gains from the disposition of property other than property held in a trade or business in which NIIT does not apply.

The NIIT does not apply to certain types of income that taxpayers can exclude for regular income tax purposes such as tax-exempt state or municipal bond interest, Veterans Administration benefits, or gain from the sale of a principal residence but only that amount excluded for income tax purposes.

Modified adjusted gross income (MAGI), for purposes of the NIIT is generally defined as adjusted gross income (AGI) for regular income tax purposes increased by the foreign earned income exclusion (but also adjusted for certain deductions related to the foreign earned income). For individual taxpayers who have not excluded any foreign earned income, their MAGI is generally the same as their regular AGI.

Reporting Net Investment Income Tax

Compute the tax on Form 8960 (PDF), Net Investment Income Tax—Individuals, Estates, and Trusts.

  • Individuals report this tax on Form 1040 (PDF), U.S. Individual Income Tax Return;
  • Estates and trusts report this tax on Form 1041 (PDF), U.S. Income Tax Return for Estates and Trusts.

For additional information, refer to the Form 8960 Instructions (PDF) and to Questions and Answers on the Net Investment Income Tax on IRS.gov.

Taxpayers may need to increase their income tax withholding or estimated taxes to consider any additional tax liability associated with the NIIT in order to avoid certain penalties.

The IRS Withholding Calculator can be used to help determine necessary changes in withholding by your employer, or see our Estimated Taxes page on IRS.gov for resources to help you recalculate those payments. See Publication 505, Tax Withholding and Estimated Tax, for more information in either instance.

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Page Last Reviewed or Updated: January 16, 2015