What income is explicitly excluded from the NIIT?

Several important income categories are excluded: wages and self-employment income (active business income), Social Security benefits, IRA and 401(k) distributions, distributions from tax-exempt organizations, income from active S-Corp or partnership interests where you materially participate, tax-exempt interest, and gain from the sale of a primary residence up to the $250,000/$500,000 exclusion. The most common misconception is that all investment income triggers NIIT — it only applies once your MAGI exceeds the threshold.

How does NIIT interact with capital gains tax rates?

NIIT stacks on top of the regular capital gains rate. For a taxpayer with MAGI above the threshold: short-term gains face ordinary income tax PLUS 3.8% NIIT. Long-term gains face the applicable LTCG rate PLUS 3.8% NIIT. The combined effective rates: 0% LTCG → 3.8% effective. 15% LTCG → 18.8% effective. 20% LTCG → 23.8% effective. The NIIT is reported on Form 8960.

Can an S-Corp election help reduce NIIT?

Yes, in specific circumstances. If you have passive rental income that you could restructure as active business income through an S-Corp (for example, a property management business where you materially participate), that income would be excluded from NII. Similarly, passive partnership income where you do not materially participate is subject to NIIT; increasing your material participation can reclassify that income as active. This is a complex area — consult a CPA before restructuring for NIIT purposes, as the same income may become subject to SE tax if converted to active income.

What is the "lesser of" rule and why does it matter?

NIIT is computed on the lesser of (a) your net investment income or (b) the amount by which your MAGI exceeds the threshold. This means: if you are only slightly above the threshold, only the excess is subject to NIIT — not all of your NII. If you are well above the threshold, you likely pay 3.8% on your full NII. The "binding constraint" display in this calculator shows which applies in your case. Being close to the threshold creates planning opportunities: strategies that reduce MAGI by even a few thousand dollars can eliminate or substantially reduce NIIT.

Does the NIIT apply to home sale gains?

Only to the extent gains exceed the primary residence exclusion. If you sell your primary home and exclude $250,000 (single) or $500,000 (MFJ) of gain, only any excess gain is included in NII. The excluded portion is not subject to NIIT. Vacation homes, investment properties, and rental properties have no such exclusion — 100% of the gain is NII.

Are there strategies to reduce NIIT besides income reduction?

Yes. Beyond keeping MAGI below the threshold: (1) Installment sales spread gain recognition over multiple years to stay near or below the threshold each year. (2) Tax-loss harvesting can offset capital gains and reduce NII. (3) Qualified Opportunity Zone investments defer and partially reduce gain recognition. (4) Donor-Advised Funds can offset income in high-gain years. (5) For passive rental income, increasing material participation can reclassify it as active income. (6) Charitable remainder trusts can remove appreciated assets from the estate while deferring recognition.

Tax

Net Investment Income Tax (NIIT) Calculator — 3.8% Surtax on Investment Income

Calculate your 3.8% net investment income tax surtax — and see exactly which income types trigger it, how close you are to the threshold, and strategies to reduce your exposure.

By The FinCalc TeamUpdated May 29, 2026

The Net Investment Income Tax is a 3.8% federal surtax on investment income — dividends, interest, capital gains, and passive rental income — that applies when your Modified Adjusted Gross Income exceeds $200,000 (single) or $250,000 (married filing jointly). Enacted as part of the Affordable Care Act in 2013, these thresholds have never been adjusted for inflation, so the number of taxpayers subject to NIIT grows every year. On top of a 23.8% effective rate on long-term capital gains (20% + 3.8% NIIT), the surtax represents a significant and often overlooked cost for investors and property owners.

How the Net Investment Income Tax Works

The Formula

The NIIT is 3.8% on the lesser of:

Your net investment income (NII), or
The amount by which your MAGI exceeds the threshold

| Filing Status | NIIT Threshold | Not Inflation-Indexed Since | |--------------|---------------|----------------------------| | Single / HoH | $200,000 | 2013 | | Married Filing Jointly | $250,000 | 2013 | | Married Filing Separately | $125,000 | 2013 |

Example: $220,000 MAGI, $30,000 NII (single filer)

Threshold: $200,000
MAGI over threshold: $20,000
NII: $30,000
NIIT base = min($30,000, $20,000) = $20,000
NIIT owed = $20,000 × 3.8% = $760

What Counts as Net Investment Income

Included:

Taxable interest, ordinary dividends, qualified dividends
Net capital gains (short- and long-term)
Net passive rental income (after expenses and depreciation)
Royalties, non-qualified annuity earnings
Passive partnership and S-corp income

Not included:

Wages and active business income
IRA/401(k)/pension distributions
Social Security benefits
Active rental income (Real Estate Professional status)
Tax-exempt interest
Home sale gain within the $250K/$500K exclusion

The Stacking Effect on Capital Gains

For taxpayers above the threshold, qualified dividends and long-term capital gains face both the preferential LTCG rate and the 3.8% NIIT:

| LTCG Rate | + NIIT | = Combined | |-----------|--------|-----------| | 0% | 3.8% | 3.8% | | 15% | 3.8% | 18.8% | | 20% | 3.8% | 23.8% |

Short-term gains and ordinary income are not stacked — the 3.8% is calculated on the NII portion, not on top of the ordinary rate. But the combined burden is still significant.

Who Should Use This Calculator

If you are near the $200K/$250K MAGI threshold, this calculator shows exactly how much of your NII is exposed and whether a modest income reduction strategy would eliminate the surtax entirely. Being $5,000 over threshold means only $5,000 of NII is taxed at 3.8% — a strategy costing $1,000 in deductions saves only $190. Being $50,000 over means the full $50,000 is potentially exposed.

If you have a large capital gains event (property sale, business sale, RSU vesting), model the NIIT exposure before the transaction. An installment sale structure can spread the gain over multiple years and keep annual MAGI near but below the threshold.

If you own rental properties, the passive rental income input shows your NIIT exposure from rental income. If you can qualify as a Real Estate Professional (750+ hours, more than half your working time), the rental income becomes active and escapes NIIT.

If you are doing Roth conversions, note that Roth conversions increase MAGI (as ordinary income) and can push you above the NIIT threshold — inadvertently subjecting investment income to the surtax. Model both the income tax benefit of the conversion and any NIIT exposure it creates.

Related Calculators

Backdoor Roth Pro-Rata Rule Calculator — converting IRA money to Roth increases MAGI and can push you over the NIIT threshold
S-Corp Reasonable Compensation Calculator — S-Corp structure can affect whether rental income is active or passive

Understanding the Inputs

MAGI Excluding Investment Income: Your Modified Adjusted Gross Income before adding any of the net investment income items below. This is roughly: wages + business income + pensions + IRA distributions + Social Security (taxable portion) + any other non-NII income, minus above-the-line deductions. The IRS adds the NII categories listed below to this number to compute the final MAGI that is compared to the threshold. Knowing this number separately helps you understand whether you are below, at, or above the threshold before NII is even counted.
Interest & Ordinary Dividends: Taxable interest income from bank accounts, CDs, Treasury bills, bond funds, and other interest-bearing accounts, plus ordinary (non-qualified) dividends. Both are fully subject to NIIT when your MAGI exceeds the threshold. Tax-exempt municipal bond interest is NOT included in NII (though it may affect the NIIT calculation indirectly by raising MAGI in certain situations — this calculator does not model that edge case).
Qualified Dividends: Dividends from domestic corporations and qualifying foreign corporations, held for the required holding period. These are taxed at the preferential 0%/15%/20% LTCG rate for income tax purposes — but the 3.8% NIIT applies on top of those rates. A taxpayer in the 20% LTCG bracket who is also subject to full NIIT pays an effective 23.8% on qualified dividends.
Net Short-Term Capital Gains: Gains from assets sold after holding 12 months or less. Short-term gains are taxed as ordinary income and are also subject to NIIT. Enter the net amount (gains minus short-term losses). If you have a net short-term loss, enter 0 — losses don't directly reduce other NII categories for NIIT purposes (the netting rules are applied within each category).
Net Long-Term Capital Gains: Gains from assets held longer than 12 months, including stock sales, mutual fund distributions, and gain from real property sales (above the primary home exclusion). Enter the net amount. Long-term gains from installment sales are also NII — only the principal portion is excluded.
Net Passive Rental Income: Net income from rental properties where you do not materially participate (passive activities). This includes typical landlord rental income after expenses and depreciation. If you qualify as a Real Estate Professional (750+ hours/year, more than half your services), your rental income is treated as active and excluded from NII. Net rental losses do not create a negative NII — enter 0 if net rental is a loss.
Other Net Investment Income: Non-qualified annuity distributions (the earnings portion), royalties, income from passive partnership or S-corp interests where you do not materially participate. Does NOT include distributions from qualified retirement accounts (IRAs, 401k), Social Security benefits, wages, or active business income.

Frequently Asked Questions

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The FinCalc Team

Personal Finance Experts

The FinCalc team is a group of personal finance writers, analysts, and engineers dedicated to building accurate, transparent financial calculators. Every formula is verified against industry standards and explained in plain language.

Last reviewed and updated: May 29, 2026