Form 8960: Who Pays the 3.8% Net Investment Income Tax (2026)

Form 8960 calculates the 3.8% Net Investment Income Tax (NIIT), which you owe for 2026 only when your modified adjusted gross income exceeds $200,000 as a single filer, $250,000 married filing jointly, or $125,000 married filing separately, and you have investment income. The tax is 3.8% of the smaller of two numbers: your net investment income, or the amount your MAGI exceeds the threshold. The result flows to Schedule 2, Line 12 of your Form 1040. Those thresholds have never been adjusted for inflation, which is why a tax aimed at high earners in 2013 now reaches ordinary two-income households with a brokerage account.

Key takeaways:

• The NIIT is 3.8% of the smaller of your net investment income or your MAGI above the threshold: $200,000 single or head of household, $250,000 married filing jointly, $125,000 married filing separately
• The thresholds are frozen at their 2013 levels with no inflation adjustment, so more filers cross them every year
• Investment income means interest, dividends, capital gains, passive rental income, royalties, and non-qualified annuities. Wages, self-employment income, and 401(k)/IRA distributions are never NII
• Home-sale gain counts only above the Section 121 exclusion ($250,000 single / $500,000 joint)
• Trusts and estates hit the 3.8% at just $16,000 of undistributed investment income in 2026
• No employer or broker withholds NIIT, so it usually lands as a balance due at filing

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What Form 8960 Is and Who Must File It

Form 8960, Net Investment Income Tax — Individuals, Estates, and Trusts, is the one-page IRS form that computes the 3.8% surtax created under IRC §1411 by the Health Care and Education Reconciliation Act of 2010. The tax took effect in 2013 and attaches to your Form 1040 (or Form 1041 for a trust or estate).

You must file Form 8960 for 2026 if both are true:

• Your MAGI exceeds the threshold for your filing status ($200,000 single or head of household, $250,000 married filing jointly or qualifying surviving spouse, $125,000 married filing separately), and
• You have net investment income: interest, dividends, capital gains, passive rental income, royalties, or non-qualified annuity income

For most filers, MAGI simply equals adjusted gross income (Form 1040, Line 11). The "modified" part matters only if you claim the foreign earned income exclusion under Section 911 or own stock in certain foreign corporations; those excluded amounts get added back.

The trigger is MAGI, not investment income. A retiree with $150,000 of capital gains and a MAGI of $190,000 owes nothing. A W-2 employee with a $205,000 salary and $3,000 of dividends owes the tax on $3,000. High total income pulls small investment income into the net, which surprises people who think of the NIIT as a tax on big portfolios.

The NIIT Thresholds Are Frozen at $200,000 / $250,000 / $125,000

Congress set the Section 1411 thresholds in 2010 and never indexed them to inflation. They are identical for 2026 to what they were in 2013, and they match the earned-income thresholds for the 0.9% Additional Medicare Tax on Form 8959.

The freeze is the whole story of who pays. In 2013, a $200,000 salary put you near the top 3% of earners. Wage growth since then has pushed millions of households over the same fixed line, which is why the classic search that leads people here is some version of "why do I suddenly owe a 3.8% tax." Nothing about your investing changed. Your MAGI crossed a number that never moves.

Notice the married-filing-jointly threshold is $250,000, not double the single amount. Two earners at $150,000 each are $50,000 over the line as a couple, while either would clear it comfortably alone.

How the 3.8% Net Investment Income Tax Is Calculated

The NIIT is 3.8% of the smaller of (a) your net investment income or (b) your MAGI minus your threshold. That lesser-of structure means the tax never touches more than your investment income, and never more than the amount by which you crossed the line.

Two consequences follow. If your MAGI barely clears the threshold, you pay 3.8% on a thin slice no matter how large your portfolio income is. If your MAGI is far above the threshold, all of your investment income is taxed, but your wages still are not.

Worked Example: Tom Pays on the Excess Slice, Not All His Dividends

Tom is single with a $190,000 salary and a taxable brokerage account that produced $12,000 of dividends, $2,000 of interest, and $4,000 of capital gain distributions in 2026. His net investment income is $18,000 and his MAGI is $208,000.

A common misreading of this tax is 3.8% × $18,000 = $684. Tom actually owes $304, because the $8,000 excess is the smaller number. Every dollar of salary he earns from here effectively drags another dollar of his dividends into the 3.8% net, until all $18,000 is inside.

Estimate Your Own 3.8% Slice

What Counts as Net Investment Income on Form 8960

Net investment income under Section 1411 is investment-type income minus the expenses allocable to it. For 2026 it includes:

• ✅ Taxable interest on bank accounts, CDs, Treasuries, and corporate bonds
• ✅ Dividends, both ordinary and qualified (qualified dividends get lower capital-gains rates, but they are still NII)
• ✅ Capital gains, short-term and long-term: stock and fund sales, crypto, investment real estate
• ✅ Rental income that is passive to you, which is most landlords (Schedule E income flows to Form 8960, Line 4a)
• ✅ Royalties from oil, gas, minerals, patents, and copyrights you did not create in a trade or business
• ✅ Non-qualified annuity distributions (the earnings portion)
• ✅ Passive K-1 income from partnerships and S corporations where you do not materially participate
• ✅ Gain on a home sale above the Section 121 exclusion (details below)

Whether you owe capital gains tax and how much interacts with your bracket; our capital gains tax calculator shows the 0%, 15%, or 20% rate that applies before the 3.8% is stacked on top.

Home Sales: Only Gain Above the Section 121 Exclusion Is NII

Selling your main home does not automatically trigger the NIIT. Gain you exclude under Section 121, up to $250,000 for single filers and $500,000 for joint filers, never enters net investment income. Only the gain above the exclusion counts. A couple who bought a house for $400,000 and sells it for $1,050,000 has a $650,000 gain; $500,000 is excluded, and $150,000 lands on Form 8960, Line 5a as investment income. A sale entirely inside the exclusion produces zero NII, and if your MAGI stays under the threshold, even a taxable slice of home-sale gain costs nothing extra.

What Does NOT Count as Net Investment Income

The NIIT never applies to earned income or retirement plan money, no matter how high your MAGI is. Excluded from NII:

• ❌ Wages and salary (those face the 0.9% Additional Medicare Tax instead, above the same thresholds)
• ❌ Self-employment income already subject to SE tax
• ❌ Distributions from qualified retirement plans: 401(k), 403(b), 457(b), traditional and Roth IRAs, pensions
• ❌ Tax-exempt municipal bond interest, which stays out of both NII and MAGI
• ❌ Active business income from a partnership or S corporation where you materially participate
• ❌ Rental income of a real estate professional who materially participates in the rental activity (the Section 1411 regulations include a 500-hour safe harbor)
• ❌ Social Security benefits, alimony, unemployment compensation, and Alaska Permanent Fund dividends
• ❌ Everything, if you are a nonresident alien: the NIIT does not apply to NRAs at all

Not NII, but It Still Raises Your MAGI

A 401(k) or IRA distribution is never taxed the extra 3.8%. It still counts in MAGI, and MAGI is what sets your taxable excess. A retiree with $60,000 of dividends and gains who takes a $120,000 traditional-IRA withdrawal can push MAGI over $200,000 and expose those dividends to the NIIT, even though the withdrawal itself escapes it. Roth conversions do the same in the conversion year. Timing large retirement-account moves against the frozen thresholds is one of the few places this tax rewards planning.

Form 8960 Line by Line (Parts I–III)

Form 8960 is one page with three parts: Part I totals your investment income, Part II subtracts allocable expenses, and Part III runs the lesser-of math. The line references below match the current revision of the form.

Part I: Investment Income (Lines 1–8)

Line 1 is taxable interest and Line 2 is ordinary dividends, both straight off your 1099s and Form 1040. Line 3 is the taxable portion of non-qualified annuities. Line 4a carries net income from rentals, royalties, partnerships, S corporations, and trusts (the Schedule E total), and Line 4b backs out the portion from active, non-passive businesses so only passive amounts remain in the net; Line 4c combines them. Line 5a is your net gain or loss from property sales, the Schedule D result, with Line 5b removing gains that are not subject to the NIIT (like an active business sale) and Line 5c adjusting for sales of partnership or S-corp interests; Line 5d combines them. Lines 6 and 7 handle foreign-corporation adjustments and other modifications. Line 8 is your total investment income.

Part II: Investment Expenses (Lines 9a–11)

Part II reduces investment income by expenses allocable to it: investment interest expense on Line 9a, state, local, and foreign income taxes allocable to investment income on Line 9b, and other investment expenses on Line 9c. Line 10 catches additional modifications, and Line 11 totals the deductions. Filers who take the standard deduction typically have nothing here, which is why net investment income usually just equals gross investment income.

Part III: The Tax Computation (Lines 12–17)

Line 12 is net investment income: Line 8 minus Line 11. Line 13 is your MAGI, Line 14 is your filing-status threshold, and Line 15 is the excess of MAGI over the threshold (not below zero). Line 16 takes the smaller of Line 12 or Line 15, and Line 17 multiplies it by 3.8%. That amount goes to Schedule 2 (Form 1040), Line 12, one line below where Form 8959's total lands. Estates and trusts skip to Lines 18a–21, which apply the same lesser-of logic to undistributed net investment income and carry the result to Form 1041, Schedule G.

Worked Example: Priya's Rental Sale Crosses the $250,000 Joint Threshold

Priya and her spouse file jointly with $175,000 of combined W-2 wages. In 2026 they sold a rental condo Priya had owned for nine years at an $85,000 gain, sold index funds for a $22,000 long-term gain, and collected $6,000 of dividends and $2,000 of interest.

The rental was a passive activity for Priya, so the entire $85,000 gain is investment income; a real estate professional materially participating in the activity would have backed it out on Line 5b. Note the lesser-of formula working in her favor: $115,000 of investment income, but only the $40,000 excess is taxed, because wages make up most of their MAGI. The rental sale also carries its own depreciation-recapture bill at up to 25%, separate from and in addition to the NIIT.

Form 8959 vs Form 8960: The 0.9% and 3.8% Surtaxes Compared

The two Affordable Care Act-era surtaxes share the same $200,000 / $250,000 / $125,000 thresholds and confuse filers every season. They tax opposite halves of your income. Form 8959 computes the 0.9% Additional Medicare Tax on earned income; Form 8960 computes the 3.8% NIIT on investment income. The same person can owe both in the same year, but never on the same dollar.

A single filer with $230,000 of wages and $40,000 of dividends owes both: Form 8959 charges 0.9% on the $30,000 of wages over $200,000 ($270), and Form 8960 charges 3.8% on the dividends, since $40,000 of NII is smaller than the $70,000 MAGI excess ($1,520). Total surtaxes: $1,790, each computed on its own form, each landing on its own Schedule 2 line.

Trusts and Estates Owe NIIT Above Just $16,000 in 2026

For a non-grantor trust or an estate, the threshold is not $200,000. It is the dollar amount where the top income tax bracket for trusts begins, which is $16,000 for 2026 under Rev. Proc. 2025-32. A trust owes 3.8% on the smaller of its undistributed net investment income or its AGI above $16,000, computed on Form 8960, Lines 18a–21, and reported on Form 1041, Schedule G.

The compressed trust brackets make retention expensive. A trust that keeps $50,000 of dividend and gain income has $34,000 above the threshold and owes $1,292 of NIIT on top of the 37% bracket it hits at the same $16,000 line. Income distributed to beneficiaries moves out of the trust's calculation and onto each beneficiary's own Form 8960, where the individual $200,000 or $250,000 thresholds usually shelter it. That gap between $16,000 and $250,000 is why trustees of trusts holding income-producing portfolios review distributions every December.

Why the NIIT Arrives as a Balance Due (Nothing Withholds It)

No system collects the NIIT during the year. Employers withhold income tax and Medicare tax from wages but know nothing about your portfolio; brokers report dividends and gains on 1099s but withhold nothing against them. The IRS states plainly that the NIIT is subject to the estimated tax provisions, so the money is due as you earn it, not in April.

If you cross the threshold in a year with a big gain, a rental sale, or a Roth conversion, either raise your W-4 withholding to cover the projected Line 17 amount or add it to your quarterly estimated payments. The prior-year safe harbor still protects you: pay 100% of last year's total tax through withholding and estimates (110% if your prior-year AGI was over $150,000) and you avoid an underpayment penalty even if the NIIT balloons this year. Working with 60,000+ small business owners at Anna Money taught me that the tax bills that actually hurt are never the biggest ones, they are the ones nothing withheld for.

How to Reduce Net Investment Income Tax

The NIIT has two dials: net investment income and MAGI. Anything that lowers either one, in a year you are over the threshold, cuts the tax.

• Harvest capital losses. Realized losses net against realized gains on Form 8960, Line 5a, shrinking NII dollar for dollar, and up to $3,000 of excess loss also lowers MAGI
• Hold municipal bonds for taxable-account cash. Muni interest is excluded from both NII and MAGI, the only income category that misses both dials
• Max out pre-tax retirement contributions. 401(k) and deductible IRA contributions lower wages and therefore MAGI, which shrinks the Line 15 excess even though wages were never NII
• Spread a large sale with an installment agreement. Recognizing a property gain over several years under Section 453 can keep each year's MAGI below the threshold instead of one year far above it
• Time retirement distributions and Roth conversions. Both raise MAGI in the year taken; splitting a conversion across two years can keep both years under the line

None of these change the rate. They keep income out of the year, or out of the categories, where the 3.8% attaches.

Common Mistakes With Form 8960

Multiplying all investment income by 3.8%. The tax applies to the smaller of NII or the MAGI excess. Tom owed $304, not $684, because only $8,000 of his MAGI cleared the threshold.

Assuming qualified dividends escape. Qualified dividends get the 0%/15%/20% capital-gains rate for regular tax, but they are ordinary dividends on Form 8960, Line 2. A 15% dividend can really cost 18.8%.

Forgetting the home-sale slice. Gain above the $250,000/$500,000 Section 121 exclusion is NII on Line 5a. Big-appreciation sales in expensive markets routinely cross it.

Ignoring MAGI creep from retirement accounts. Distributions and Roth conversions are not NII, but they inflate Line 13 and can pull an otherwise-safe portfolio into the tax.

Leaving passive K-1 income off Line 4a. Passive partnership and S-corp income is NII even though it arrives on a K-1 rather than a 1099. Material participation is what removes it, not the form it is reported on.

Using the individual thresholds for a trust. A non-grantor trust's threshold is $16,000 for 2026, not $200,000. Retained investment income above that line owes the 3.8% on Form 8960, Lines 18a–21.

Watch Your MAGI Build All Year: How Jupid Helps

The NIIT is a threshold tax, and threshold taxes are managed in November, not April. Jupid is an AI accountant in WhatsApp and iMessage that connects to your bank accounts and categorizes every transaction at 95.9% accuracy, so your real income picture, business profit, and investment cash flows included, stays current all year. Ask "where is my MAGI heading?" before you sell a rental or convert an IRA, and the answer reflects live numbers instead of last spring's return. When filing season comes, the same data feeds your return automatically. Try Jupid.

Action Checklist

• Add up 2026 investment income so far: interest, dividends, realized gains, passive rental profit, royalties
• Project year-end MAGI (AGI for most filers) and compare it to your threshold: $200,000, $250,000, or $125,000
• Over the line? Compute 3.8% × the smaller of NII or the excess, and set that amount aside
• Raise W-4 withholding or add the amount to your remaining 1040-ES estimated payments
• Selling a home? Subtract the Section 121 exclusion first; only the remainder is NII
• Before a Roth conversion or large IRA withdrawal, check what it does to your MAGI excess
• Trustees: compare undistributed investment income to the $16,000 trust threshold before year-end distributions
• At filing, complete Form 8960 Parts I–III and carry Line 17 to Schedule 2, Line 12

Sources

• IRS — About Form 8960, Net Investment Income Tax
• IRS — Instructions for Form 8960
• IRS — Questions and Answers on the Net Investment Income Tax
• IRS — Topic No. 559, Net Investment Income Tax
• IRS — Rev. Proc. 2025-32 (2026 inflation adjustments, trust brackets)

This guide is for general educational purposes and does not constitute tax, legal, or accounting advice. The Net Investment Income Tax depends on your MAGI, the character of each income item, and material-participation facts specific to you. For advice specific to your situation, consult a qualified tax professional.