Originally published October 2015. Last updated March 2026.
The net investment income tax (NIIT) is a 3.8% surtax on investment income for higher earners. It’s been in effect since 2013 and catches more retirees than you’d expect.
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Who Pays the 3.8% Surtax?
The NIIT applies when your modified adjusted gross income (MAGI) exceeds:
- $250,000 for married filing jointly
- $200,000 for single filers
- $125,000 for married filing separately
These thresholds haven’t been adjusted for inflation since 2013. As incomes and account balances have grown, more people are crossing them.
The 3.8% tax applies to the lesser of your net investment income or the amount by which your MAGI exceeds the threshold.
What Counts as Net Investment Income?
- Interest, dividends, and capital gains
- Rental income and royalties
- Passive business income
- Gains from selling a home (above the $250K/$500K exclusion)
What doesn’t count: Wages, self-employment income (already subject to Medicare tax), Social Security benefits, tax-exempt bond interest, and distributions from retirement accounts (though those distributions increase your MAGI, which can push you over the threshold).
How Retirees Get Caught
Retirees often trigger the NIIT unexpectedly when several income events stack up in one year:
- Large RMD from a growing IRA balance
- Sale of a rental property or business
- Sale of a home with gains above the exclusion
- Inheritance or one-time capital gain event
- Taking Social Security while also having investment income
Strategies to Reduce Exposure
- Roth conversions in low-income years reduce future RMDs, keeping MAGI lower later
- Tax-loss harvesting offsets capital gains, reducing net investment income
- Qualified charitable distributions (QCDs) satisfy RMDs without adding to MAGI
- Municipal bonds generate tax-exempt interest that doesn’t count as net investment income
- Spreading income events across multiple years instead of realizing everything at once
- Installment sales for business or real estate sales, recognizing gain over time
FAQ
Is this the same as the additional Medicare tax on wages?
No. The 0.9% additional Medicare tax applies to wages and self-employment income above $200K/$250K. The 3.8% NIIT applies to investment income. They’re separate taxes targeting different income types, but both use similar MAGI thresholds.
Will these thresholds ever adjust for inflation?
As written, no. The $200K/$250K thresholds are fixed in the statute. Congress would need to change the law to index them. That means more people cross the threshold every year.
Schedule a free 20-minute consultation to review your investment income tax exposure.
R.L. Brown Wealth Management
106 W Vine St, Suite 300, Lexington, KY 40507
859.317.5889
