Find out if the Net Investment Income Tax applies to you.

Basics of the Net Investment Income Tax

1. What is the Net Investment Income Tax (NIIT)?

The Net Investment Income Tax is imposed by section of the Internal Revenue Code. The NIIT applies at a rate of % to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts.

2. When did the Net Investment Income Tax take effect?

The Net Investment Income Tax went into effect on Jan. 1, The NIIT affects income tax returns of individuals, estates and trusts, beginning with their first tax year beginning on (or after) Jan. 1, It does not affect income tax returns for the taxable year filed in

Who Owes the Net Investment Income Tax

3. What individuals are subject to the Net Investment Income Tax?

Individuals will owe the tax if they have Net Investment Income and also have modified adjusted gross income over the following thresholds:

Taxpayers should be aware that these threshold amounts are not indexed for inflation.

If you are an individual who is exempt from Medicare taxes, you still may be subject to the Net Investment Income Tax if you have Net Investment Income and also have modified adjusted gross income over the applicable thresholds.

4. What is modified adjusted gross income for purposes of the Net Investment Income Tax?

For the Net Investment Income Tax, modified adjusted gross income is adjusted gross income (Form , Line 37) increased by the difference between amounts excluded from gross income under section (a)(1) and the amount of any deductions (taken into account in computing adjusted gross income) or exclusions disallowed under section (d)(6) for amounts described in section (a)(1). In the case of taxpayers with income from controlled foreign corporations (CFCs) and passive foreign investment companies (PFICs), they may have additional adjustments to their AGI. See section (e) of the final regulations. 

5. What individuals are not subject to the Net Investment Income Tax?

Nonresident Aliens (NRAs) are not subject to the Net Investment Income Tax. If an NRA is married to a U.S. citizen or resident and has made, or is planning to make, an election under section (g) or (h) to be treated as a resident alien for purposes of filing as Married Filing Jointly, the final regulations provide these couples special rules and a corresponding section (g)/(h) election for the NIIT. 

A dual-resident individual, within the meaning of regulation §(b)-7(a)(1), who determines that he or she is a resident of a foreign country for tax purposes pursuant to an income tax treaty between the United States and that foreign country and claims benefits of the treaty as a nonresident of the United States is considered a NRA for purposes of the NIIT.

A dual-status individual, who is a resident of the United States for part of the year and a NRA for the other part of the year, is subject to the NIIT only with respect to the portion of the year during which the individual is a United States resident. The threshold amount (described in # 3 above) is not reduced or prorated for a dual-status resident. 

6. What estates and trusts are subject to the Net Investment Income Tax?

Estates and trusts are subject to the Net Investment Income Tax if they have undistributed Net Investment Income and also have adjusted gross income over the dollar amount at which the highest tax bracket for an estate or trust begins for such taxable year under section 1(e) (for tax year , this threshold amount is $11,). Generally, the threshold amount for the upcoming year is updated by IRS each fall in a revenue procedure. For , the threshold amount is $12, (See Rev. Proc.  PDF). 

There are special computational rules for certain unique types of trusts, such as Qualified Funeral Trusts, Charitable Remainder Trusts and Electing Small Business Trusts, which can be found in the final regulations (see # 20 below).

7. What estates and trusts are not subject to the Net Investment Income Tax?

The following trusts are not subject to the Net Investment Income Tax:

1. Trusts that are exempt from income taxes imposed by Subtitle A of the Internal Revenue Code (e.g., charitable trusts and qualified retirement plan trusts exempt from tax under section , and Charitable Remainder Trusts exempt from tax under section ).
2. A trust or decedent’s estate in which all of the unexpired interests are devoted to one or more of the purposes described in section (c)(2)(B).
3. Trusts that are classified as “grantor trusts” under sections
4. Trusts that are not classified as “trusts” for federal income tax purposes (e.g., Real Estate Investment Trusts and Common Trust Funds).
5. Electing Alaska Native Settlement Trusts.
6. Perpetual Care (Cemetery) Trusts. 

What is Included in Net Investment Income

8. What is included in Net Investment Income?

In general, investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities and businesses that are passive activities to the taxpayer (within the meaning of section ). To calculate your Net Investment Income, your investment income is reduced by certain expenses properly allocable to the income (see #13 below).

9. What are some common types of income that are not Net Investment Income?

Wages, unemployment compensation; operating income from a nonpassive business, Social Security Benefits, alimony, tax-exempt interest, self-employment income, Alaska Permanent Fund Dividends (see Rev. Rul. , CB ) and distributions from certain Qualified Plans (those described in sections (a), (a), (b), , A or (b)).

What kinds of gains are included in Net Investment Income?

To the extent that gains are not otherwise offset by capital losses, the following gains are common examples of items taken into account in computing Net Investment Income:

1. Gains from the sale of stocks, bonds, and mutual funds.
2. Capital gain distributions from mutual funds.
3. Gain from the sale of investment real estate (including gain from the sale of a second home that is not a primary residence).
4. Gains from the sale of interests in partnerships and S corporations (to the extent the partner or shareholder was a passive owner). See section of the proposed regulations.

Does this tax apply to gain on the sale of a personal residence?

The Net Investment Income Tax does not apply to any amount of gain that is excluded from gross income for regular income tax purposes. The pre-existing statutory exclusion in section exempts the first $, ($, in the case of a married couple) of gain recognized on the sale of a principal residence from gross income for regular income tax purposes and, thus, from the NIIT.

Example 1: A, a single filer, earns $, in wages and sells his principal residence that he has owned and resided in for the last 10 years for $, A’s cost basis in the home is $, A’s realized gain on the sale is $, Under section , A may exclude up to $, of gain on the sale. Because this gain is excluded for regular income tax purposes, it is also excluded for purposes of determining Net Investment Income. In this example, the Net Investment Income Tax does not apply to the gain from the sale of A’s home.

Example 2: B and C, a married couple filing jointly, sell their principal residence that they have owned and resided in for the last 10 years for $ million. B and C’s cost basis in the home is $, B and C’s realized gain on the sale is $, The recognized gain subject to regular income taxes is $, ($, realized gain less the $, section exclusion). B and C have $, of other Net Investment Income, which brings B and C’s total Net Investment Income to $, B and C’s modified adjusted gross income is $, and exceeds the threshold amount of $, by $50, B and C are subject to NIIT on the lesser of $, (B’s Net Investment Income) or $50, (the amount B and C’s modified adjusted gross income exceeds the $, married filing jointly threshold). B and C owe Net Investment Income Tax of $1, ($50, X %).

Example 3: D, a single filer, earns $45, in wages and sells her principal residence that she has owned and resided in for the last 10 years for $1 million. D’s cost basis in the home is $, D’s realized gain on the sale is $, The recognized gain subject to regular income taxes is $, ($, realized gain less the $, section exclusion), which is also Net Investment Income. D’s modified adjusted gross income is $, Since D’s modified adjusted gross income is below the threshold amount of $,, D does not owe any Net Investment Income Tax.

Does Net Investment Income include interest, dividends and capital gains of my children that I report on my Form using Form ?

The amounts of Net Investment Income that are included on your Form by reason of Form are included in calculating your Net Investment Income. However, the calculation of your Net Investment Income does not include (a) amounts excluded from your Form due to the threshold amounts on Form and (b) amounts attributable to Alaska Permanent Fund Dividends.

What investment expenses are deductible in computing NII?

In order to arrive at Net Investment Income, Gross Investment Income (items described in items above) is reduced by deductions that are properly allocable to items of Gross Investment Income. Examples of deductions, a portion of which may be properly allocable to Gross Investment Income, include investment interest expense, investment advisory and brokerage fees, expenses related to rental and royalty income, tax preparation fees, fiduciary expenses (in the case of an estate or trust) and state and local income taxes.

Will I have to pay both the % Net Investment Income Tax and the additional .9% Medicare tax?

You may be subject to both taxes, but not on the same type of income.

The % Additional Medicare Tax applies to individuals’ wages, compensation and self-employment income over certain thresholds, but it does not apply to income items included in Net Investment Income. See more information on the Additional Medicare Tax.

How the Net Investment Income Tax is Reported and Paid

If I am subject to the Net Investment Income Tax, how will I report and pay the tax?

Individuals, estates, and trusts will use Form  PDF and instructions PDF to compute their Net Investment Income Tax. 

For individuals, the tax will be reported on, and paid with, the Form For estates and trusts, the tax will be reported on, and paid with, the Form

Is the Net Investment Income Tax subject to the estimated tax provisions?

The Net Investment Income Tax is subject to the estimated tax provisions. Individuals, estates and trusts that expect to be subject to the tax in or thereafter should adjust their income tax withholding or estimated payments to account for the tax increase in order to avoid underpayment penalties. For more information on tax withholding and estimated tax, see Publication , Tax withholding and Estimated Tax.

Can tax credits reduce my NIIT liability?

Any federal income tax credit that may be used to offset a tax liability imposed by subtitle A of the Code may be used to offset the NII. However, if the tax credit is allowed only against the tax imposed by chapter 1 of the Code (regular income tax), those credits may not reduce the NIIT. For example, foreign income tax credits (sections 27(a) and (a)) and the general business credit (section 38) are allowed as credits only against the tax imposed by chapter 1 of the Code, and therefore may not be used to reduce your NIIT liability. If you take foreign income taxes as an income tax deduction (versus a tax credit), some (or all) of the deduction amount may deducted against NII.  

Does the tax have to be withheld from wages?

No, but you may request that additional income tax be withheld from your wages.

Examples of the Calculation of the Net Investment Income Tax

Single taxpayer with income less than the statutory threshold.

Taxpayer, a single filer, has wages of $, and $15, of dividends and capital gains. Taxpayer’s modified adjusted gross income is $,, which is less than the $, statutory threshold. Taxpayer is not subject to the Net Investment Income Tax.

Single taxpayer with income greater than the statutory threshold.

Taxpayer, a single filer, has $, of wages. Taxpayer also received $90, from a passive partnership interest, which is considered Net Investment Income. Taxpayer’s modified adjusted gross income is $,

Taxpayer’s modified adjusted gross income exceeds the threshold of $, for single taxpayers by $70, Taxpayer’s Net Investment Income is $90,

The Net Investment Income Tax is based on the lesser of $70, (the amount that Taxpayer’s modified adjusted gross income exceeds the $, threshold) or $90, (Taxpayer’s Net Investment Income). Taxpayer owes NIIT of $2, ($70, x %).

Additional Information

Other than these FAQs, is there additional information available about the Net Investment Income Tax?

Yes. You can find additional information about the NIIT in the final regulations PDF and in a new proposed regulation PDF published on Dec. 2,

The proposed regulations that were published on Dec. 5, , are effective for tax years beginning after Dec. 31, , but the Net Investment Income Tax went into effect on Jan. 1,  May I rely on those proposed regulations, the proposed regulations published on Dec. 2, , and/or the final regulations, also published on Dec. 2, , for guidance on the Net Investment Income Tax during ?

Yes. For taxable years beginning before Jan. 1, (e.g., calendar year ), taxpayers may rely on the proposed regulations (published on Dec. 5, ), the proposed regulations (published on Dec. 2, ), or the final regulations (published on Dec. 2, ) for purposes of completing Form  However, to the extent that taxpayers take a position in a taxable year beginning before Jan. 1, that is inconsistent with the final regulations, and such position affects the treatment of one or more items in a taxable year beginning after Dec. 31, , then such taxpayer must make reasonable adjustments to ensure that their Net Investment Income Tax liability in the taxable years beginning after Dec. 31, is not inappropriately distorted. For example, reasonable adjustments may be required to ensure that no item of income or deduction is taken into account in computing net investment income more than once, and that carryforwards, basis adjustments and other similar items are adjusted appropriately.

Related Item: Forms and Publications