High-Income & Investment Tax Returns
Higher-income taxpayers with investment income can be subject to an additional federal tax known as the Net Investment Income Tax, or NIIT.
NIIT can become relevant when your return includes interest, dividends, capital gains, rental income, passive business income, or other investment activity and your modified adjusted gross income exceeds the applicable threshold.
What Is the Net Investment Income Tax?
The Net Investment Income Tax is a 3.8% federal tax that can apply to certain individuals who have both net investment income and modified adjusted gross income above an applicable threshold.
The tax is generally calculated on the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds the applicable threshold.
NIIT Income Thresholds
For individuals, the applicable threshold depends on filing status.
Single
$200,000
Head of Household
$200,000
Married Filing Jointly
$250,000
Married Filing Separately
$125,000
How Is NIIT Calculated?
NIIT is generally 3.8% of the smaller of:
The amount of investment income remaining after applicable deductions and adjustments.
The amount by which modified adjusted gross income exceeds the NIIT threshold for your filing status.
A Simple NIIT Example
Assume a married couple filing jointly has $300,000 of modified adjusted gross income and $30,000 of net investment income.
Their MAGI exceeds the $250,000 threshold by $50,000. Their net investment income is $30,000.
Because $30,000 is the smaller amount, the NIIT calculation would generally begin with 3.8% of $30,000, or $1,140.
What Types of Income Can Be Included in Net Investment Income?
Net investment income can include several common categories of income. The exact treatment depends on the facts of the activity and applicable tax rules.
Interest
Taxable interest can generally be included in net investment income.
Dividends
Dividend income can generally be included in net investment income.
Capital Gains
Net gains from selling stocks, securities, real estate, and other investment property can potentially be included.
Rental Income
Rental income can be included depending on the nature of the activity and whether applicable exceptions apply.
Royalty Income
Certain royalty income can be part of net investment income.
Passive Business Income
Income from certain businesses in which you do not materially participate may be included in net investment income.
What Is Generally Not Net Investment Income?
Net investment income generally does not include wages, unemployment compensation, Social Security benefits, and most income from an active trade or business in which the taxpayer materially participates.
The fact that income increases your modified adjusted gross income, however, can still indirectly affect NIIT by pushing more of your investment income into the taxable NIIT calculation.
Your W-2 Wages Can Affect NIIT Even Though Wages Are Not Investment Income
This is an important distinction.
Wages themselves generally are not included in net investment income. But higher wages increase adjusted gross income and may cause your modified adjusted gross income to exceed the applicable NIIT threshold.
That means a highly compensated employee with substantial investment income can become subject to NIIT even though the salary itself is not being taxed under the NIIT rules.
A Large Stock Sale Can Trigger NIIT
A significant stock sale can affect both sides of the NIIT calculation.
The gain can increase net investment income, and it can also increase modified adjusted gross income. This can make the year of a large capital gain materially different from an ordinary investment year.
That is one reason a major stock transaction can affect estimated tax requirements as well as the final balance due with the return.
How Can Rental Property Affect NIIT?
Rental income is commonly associated with net investment income, but the treatment can depend on whether the activity is passive, whether the rental rises to the level of a trade or business, and whether the taxpayer materially participates.
Real estate professional status and material participation can therefore become relevant to the NIIT analysis in certain rental real estate situations.
Can K-1 Income Be Subject to NIIT?
Potentially. The answer depends on what the K-1 income represents and your relationship to the underlying activity.
Income from a passive business interest may be included in net investment income, while income from certain active trade or business activities may be treated differently.
With several K-1s, each activity may need to be considered separately rather than assuming that all pass-through income receives the same NIIT treatment.
What About Selling Rental Property or a Business Interest?
Gains from property sales can require additional NIIT analysis. A taxable gain from selling investment property can potentially be part of net investment income.
Sales involving interests in partnerships or S corporations can be more complicated because the NIIT result can depend on the nature of the underlying business activities and the taxpayer's participation.
What Is Form 8960?
Form 8960, Net Investment Income Tax—Individuals, Estates, and Trusts, is used to calculate the Net Investment Income Tax.
The form brings together the applicable investment income, deductions, modified adjusted gross income, and filing-status threshold to determine whether NIIT is due and, if so, the amount of the tax.
NIIT Can Affect Estimated Tax Payments
Investment income often does not have enough federal income tax withheld to cover the additional tax created by a large gain or other investment activity.
If your income changes significantly during the year, NIIT may be one of several reasons to revisit estimated payments or other withholding.
Common NIIT Issues We See
Large Capital Gains
A large stock or investment sale can increase both net investment income and modified adjusted gross income.
Passive K-1 Income
Pass-through income from passive business interests can require NIIT analysis.
Rental Real Estate
Rental income and gains can require analysis of passive activity, trade-or-business, and participation rules.
Several Income Sources
Wages, K-1 income, investments, rentals, and business activity can combine to push MAGI above the applicable threshold.
Significant Year-to-Year Changes
A major sale or unusually profitable year can cause NIIT to appear even when it did not apply in prior years.
Estimated Tax Exposure
NIIT can increase total federal tax without automatically increasing withholding during the year.
Related Tax Resources
Frequently Asked Questions
What is the Net Investment Income Tax rate?
NIIT is 3.8% of the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds the applicable filing-status threshold.
What income level triggers NIIT?
The modified adjusted gross income thresholds are generally $200,000 for single and head-of-household filers, $250,000 for married taxpayers filing jointly, and $125,000 for married taxpayers filing separately. You must also have net investment income for NIIT to apply.
Are my wages subject to NIIT?
Wages generally are not net investment income. They can still increase your modified adjusted gross income and therefore affect whether NIIT applies to your investment income.
Are capital gains subject to NIIT?
Capital gains can be included in net investment income, subject to applicable exclusions and other rules. A large taxable gain can therefore create or increase NIIT.
Is rental income subject to NIIT?
It can be. The treatment depends on the facts, including the nature of the rental activity and applicable trade-or-business and participation rules.
What form is used to calculate NIIT?
Form 8960 is used to calculate and report the Net Investment Income Tax.
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