Topic Number 559 - Net Investment Income Tax
A 3.8 percent Net Investment Income Tax (NIIT) applies to individuals, estates, and trusts that have net investment income above applicable threshold amounts.
In the case of an individual, the NIIT is 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)
- $125,000 for married filing separately
- $200,000 in all other cases
Estates & Trusts
In the case of an estate or trust, the NIIT is 3.8 percent 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 2018 threshold is $12,500)
Definition of Net Investment Income and Modified Adjusted Gross Income
In general, net investment income for purpose of this tax, includes, but isn't limited to:
- interest, dividends, certain annuities, royalties, and rents (unless derived in a trade or business in which the NIIT doesn't 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 (to the extent taken into account in computing taxable income), other than property held in a trade or business to which NIIT doesn't apply.
The NIIT applies to income from a trade or business that is (1) a passive activity, as determined under § 469, of the taxpayer; or (2) trading in financial instruments or commodities, as determined under § 475(e)(2).
The NIIT doesn't 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 on that portion that's 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 haven't excluded any foreign earned income, their MAGI is generally the same as their regular AGI.
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 and Form 1040, Schedule 4.pdf, Other Taxes;
- Estates and trusts report this tax on Form 1041.pdf, U.S. Income Tax Return for Estates and Trusts.
Tax Withholding and Estimated Tax
Taxpayers may need to increase their income tax withholding or estimated taxes to take into account 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 for resources to help you recalculate those payments. See Publication 505, Tax Withholding and Estimated Tax for more information in either instance.
For additional information, refer to the Form 8960 Instructions and to Questions and Answers on the Net Investment Income Tax.