Net Investment Income Tax (NIIT) Calculator

Net Investment Income Tax (NIIT)

The NIIT is an additional 3.8% tax on net investment income that applies to higher-income taxpayers. It was created by the Affordable Care Act and took effect in 2013. It is sometimes called the Medicare surtax.

Formula:

NIIT = 3.8% × min(NII, max(0, MAGI - Threshold))

You pay 3.8% on whichever is smaller: your net investment income, or the amount your MAGI exceeds the threshold.

Income thresholds, and the reason they never change:

These are written into the statute with no inflation indexing, unlike almost every other figure in the tax code. They were set in 2013 and they are the same today. Every year of wage growth quietly pulls more households over the line, which is exactly what a fixed threshold is designed to do.

That also makes this one of the sharper marriage penalties in the code. Two single people can each earn $199,000 and owe nothing. Married, they are $148,000 over a threshold that is only $50,000 higher than one person’s.

What counts as Net Investment Income (NII):

• Interest income
• Dividends (qualified and ordinary)
• Capital gains (short-term and long-term)
• Rental and royalty income
• Passive business income
• Annuity income (non-retirement)

What is excluded from NII:

• Wages and self-employment income
• Social Security benefits
• IRA and 401(k) distributions
• Active business income
• Municipal bond interest (already exempt from federal income tax)

MAGI for NIIT purposes: MAGI = Adjusted Gross Income + foreign earned income exclusion (if any). For most taxpayers, MAGI equals AGI.

Example:

• Single taxpayer, MAGI = $250,000
• NII = $40,000 (dividends + capital gains)
• Amount over threshold: $250,000 - $200,000 = $50,000
• NIIT = 3.8% × min($40,000, $50,000) = 3.8% × $40,000 = $1,520

What it does to the headline rates. The top long-term capital gains rate is usually quoted as 20%. Add the NIIT and anyone paying it faces 23.8%. On short-term gains and ordinary investment income the top becomes 40.8%. Whenever you see a “20% capital gains” figure in an article, check whether the writer remembered this.

Trusts and estates get hit far harder. A non-grantor trust owes the NIIT once its undistributed income passes the top trust bracket threshold, which is a little over $15,000 rather than $200,000. Distributing income out to beneficiaries who sit below their own thresholds is the standard fix, and it is worth real money.

Planning strategies:

• Hold income-producing assets inside a 401(k) or IRA. Distributions from those are excluded from net investment income entirely, even though they raise your MAGI.
• Municipal bond interest is outside both federal income tax and the NIIT.
• Time large gains so they do not all land in one year, and harvest losses against them. Net investment income is net: capital losses reduce it.
• Material participation in a business turns passive income into active income, which is outside the NII definition altogether. The tests are strict and documented in hours, so keep a log.