Net Investment Income Tax in Retirement: What Advisors Must Plan For

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Executive summary: The net investment income tax (NIIT) is a 3.8% federal surtax on investment income that applies once modified adjusted gross income (MAGI) passes $200,000 for single filers or $250,000 for joint filers. Those thresholds have never been adjusted for inflation since the tax began in 2013, so ordinary retirees increasingly owe it. Retirement account withdrawals and Roth conversions are not investment income, but they raise MAGI and can push a client’s investment income into the tax.

Pull up the return of a couple who retired last year with a $1.6 million nest egg and look for Form 8960. If it is there, they paid a tax many retirees have never heard of: 3.8% on some or all of their dividends and capital gains, on top of the income tax they already paid on that money. They did not get a raise or sell a business. In many cases, all they did was take a required minimum distribution (RMD), realize a gain while rebalancing, or convert part of an IRA to Roth in the same year.

Those who are familiar with the tax will protest that IRA distributions, whether for Roth conversions or anything else, don’t count as “net investment income”. But, while this is true, AGI of any sort can lead other income that does count as net investment income to be taxed. So, it’s always worth paying attention to the full picture.

The net investment income tax was written in 2010 as a tax on high earners. Congress never indexed its $200k and $250k thresholds, so every year of inflation quietly redefines “high earner” downward. A couple whose income would have stayed comfortably below the joint threshold in 2013 can now graze it with a pension, two Social Security checks, and one badly timed capital gain. For advisors, the NIIT is rarely a large line item on its own. It matters because it sits inside a stack of retirement tax thresholds that all react to the same decisions, and because the planning levers that control it get pulled years before the tax shows up on a return.

This guide covers the 2026 rules, three client scenarios with the math shown, and the “threshold stack” where the NIIT, Medicare premium surcharges, and Social Security taxation collide.

What is the net investment income tax?

The net investment income tax is a 3.8% federal surtax on the lesser of a taxpayer’s net investment income or the amount by which their MAGI exceeds a fixed threshold. It is reported on Form 8960 and paid with the regular income tax return. The tax took effect on January 1, 2013.

Two definitions drive everything else in this article.

Net investment income (NII) is investment-type income after allocable deductions: interest, dividends, capital gains, rental and royalty income, income from non-qualified annuities, and income from passive businesses or businesses that trade financial instruments. It specifically excludes wages, Social Security benefits, self-employment income, tax-exempt interest, and distributions from qualified retirement plans.

Modified adjusted gross income, for NIIT purposes, is adjusted gross income (AGI) with the foreign earned income exclusion added back. For nearly every retired client, MAGI on Form 8960 simply equals AGI. That is worth saying plainly, because “MAGI” means something different in the Medicare surcharge rules and Social Security taxability, where it is AGI plus tax-exempt interest.

Unlike Medicare premium surcharges (IRMAA), the structure of the NII tax is a basic threshold, not a cliff. Crossing the threshold by one dollar does not expose all investment income to the 3.8% rate; it exposes one dollar. The exposure grows dollar-for-dollar for net investment income above the threshold until the entire NII amount is captured.

The NIIT thresholds for 2026, and why they never move

The 2026 NIIT thresholds are the same as the 2013 thresholds: $250,000 of MAGI for married couples filing jointly and qualifying surviving spouses, $200,000 for single filers and heads of household, and $125,000 for married taxpayers who file separate returns. The IRS states directly that “these threshold amounts are not indexed for inflation.”

Filing status	2026 NIIT MAGI threshold
Married filing jointly	$250,000
Qualifying surviving spouse	$250,000
Single filers and heads of household	$200,000
Married, filing a separate return	$125,000

Source: IRS, Instructions for Form 8960.

Non-indexed thresholds are a quiet form of tax increase. Every year, inflation moves ordinary retirement incomes up while the threshold stands still, so the tax reaches further into the middle of the advisor’s client base. Clients ask why they suddenly owe a tax that was “for rich people.” Congress froze the definition of rich in 2013, and inflation has been doing the rest. The drift is measurable: per the Congressional Research Service, the number of taxpayers paying the NIIT grew from 3.1 million in 2013 to 7.3 million in 2021, and annual collections grew from $16.5 billion to $59.8 billion over the same years.

The $200,000 threshold today is equivalent to $139,000 in 2013, when the tax was introduced. $250,000 today is $174,000 in 2013.

Trusts and estates deserve a note here because the difference is dramatic: a non-grantor trust pays the NIIT once its income passes the dollar amount where the top trust bracket begins, which is just $16,000 in 2026 (adjusted annually for inflation) per Rev. Proc. 2025-32. Income retained inside a trust hits the surtax at a level no individual filer would ever associate with this tax.

The One Big Beautiful Bill Act (OBBBA), signed in July 2025, reshaped much of the 2026 individual tax landscape but did not touch the NIIT: the rate is still 3.8% and the thresholds are still unindexed. What OBBBA did add is a new threshold nearby. The enhanced deduction for seniors, worth $6,000 per person age 65 and older through 2028, phases out with MAGI above $75,000 for single filers and $150,000 for joint filers, and it reacts to the same income decisions the NIIT does.

What counts as net investment income (and what only raises MAGI)

The single most useful thing an advisor can internalize about the NIIT is that income splits into three categories, not two. Some income is net investment income. Some income is not NII but still raises MAGI, which can expose other income to the tax. And a small, valuable category raises neither number.

Income type	Net investment income?	Counts toward NIIT MAGI?
Interest, dividends, capital gains	Yes	Yes
Rental and royalty income	Yes	Yes
Non-qualified annuity distributions (taxable portion)	Yes	Yes
Passive business income; trading businesses	Yes	Yes
IRA, 401(k), 403(b), and 457(b) distributions, including RMDs	No	Yes
Roth conversions	No	Yes
Pension payments	No	Yes
Wages and self-employment income	No	Yes
Social Security benefits (taxable portion)	No	Yes
Municipal bond interest	No	No, but it counts in Social Security’s provisional income formula
Qualified Roth IRA distributions	No	No
Home sale gain within the Section 121 exclusion	No	No

Sources: IRS, Net Investment Income Tax overview; IRS, Questions and Answers on the Net Investment Income Tax; IRS, Instructions for Form 8960.

The middle rows are where retirement planning actually happens. Per the Form 8960 instructions, distributions from plans described in sections 401(a), 403(a), 403(b), 408, 408A, and 457(b) are excluded from net investment income, which covers essentially every qualified account a retiree owns. But the taxable portion of those distributions lands in AGI, and AGI is MAGI for this tax. A client can owe the NIIT in a year when their portfolio income did not change at all, purely because a distribution decision lifted their MAGI over the threshold.

The bottom rows are the escape hatches. Qualified Roth distributions and gain sheltered by the Section 121 home sale exclusion (the first $250,000 of gain on a principal residence, or $500,000 for a married couple) touch neither NII nor MAGI. Municipal bond interest avoids both NIIT numbers too, with one trap for moderate-income clients that the threshold stack section covers: the Social Security taxation formula counts it anyway.

How the NIIT is calculated, step by step

The calculation takes four steps: total the net investment income, compute NII-relevant MAGI (equivalent to AGI for most taxpayers), subtract the threshold from MAGI, and apply 3.8% to the smaller of the first and third numbers. On the return, the result flows from Form 8960 to Schedule 2 and then onto Form 1040. The NIIT is also subject to the estimated-tax provisions, so a one-time gain large enough to trigger the surtax can trigger an underpayment penalty alongside it if withholding or quarterly estimates are not adjusted in the same year.

Another way to think about NIIT is as follows:

1. stack up MAGI with net investment income on top

2. Draw a line at the relevant MAGI threshold

3. Any NII above this line is subject to NII tax

A worked example makes this structure obvious.

Scenario 1: One stock sale, two very different outcomes

Linda is 61, single, and retired last year. Her income is made up of a $40,000 pension, $45,000 in IRA withdrawals, $12,000 in dividends, and $18,000 in capital gains from routine rebalancing in her taxable account. She has not claimed Social Security yet.

1. Step 1, net investment income: $12,000 + $18,000 = $30,000

2. Step 2, MAGI: $40,000 + $45,000 + $12,000 + $18,000 = $115,000

3. Step 3, threshold excess: $115,000 minus $200,000 is negative, so zero

4. Step 4, the tax: 3.8% of the lesser of $30,000 or $0. Linda owes nothing.

Now suppose Linda sells a concentrated stock position with a $120,000 long-term gain to diversify and to help her daughter with a house down payment.

1. Step 1, net investment income: $30,000 + $120,000 = $150,000

2. Step 2, MAGI: $115,000 + $120,000 = $235,000

3. Step 3, threshold excess: $235,000 minus $200,000 = $35,000

4. Step 4, the tax: 3.8% of the lesser of $150,000 or $35,000. Linda owes 3.8% of $35,000, which is $1,330.

Note what the threshold did. Linda has $150,000 of investment income, but only the $35,000 of MAGI above the threshold is exposed. The NIIT bill is $1,330, not $5,700. That is the good news. The better news is that the entire bill was optional: had Linda split the sale across December and January, realizing $60,000 of gain in each tax year, her MAGI would have been $175,000 both years, assuming similar income, and the NIIT would have been zero twice. The diversification and the gift are identical; the $1,330 disappears by moving nothing but a date.

Because Linda is 61, this sale has no Medicare consequence; the surcharge rules look at MAGI starting with the year a client turns 63, two years before Medicare enrollment at 65. Run the same sale for a 66-year-old and the timing question gets much more expensive, as the threshold stack section shows.

Advisor takeaway: The NIIT exposes the lesser of net investment income or the MAGI excess, so the marginal cost of crossing the threshold starts small and grows. For clients near the line, splitting a large gain across two tax years is often the cheapest planning move available, and it has to happen before December 31, not at tax time.

Roth conversions and the NIIT: not investment income, still a trigger

Here is the nuance that trips up even careful DIY clients: Roth conversion income is not net investment income, but a conversion can still create an NIIT bill. A conversion is a distribution from the traditional IRA with the proceeds moved into a Roth account, and per the Form 8960 instructions the converted amount is excluded from NII. But the converted amount is ordinary income, it lands in AGI, and AGI is MAGI for this tax. The conversion does not get taxed at 3.8%; it moves the measuring stick so that investment income the client already had becomes exposed. The column of MAGI below the NII is now higher, potentially pushing more NII above the threshold.

Scenario 2: The conversion window meets the surtax

Mark and Susan, both 63, retired last year and are delaying Social Security to 67 and 70. This is the classic conversion window: low income now, large IRAs, and RMDs plus two benefit checks waiting to inflate their brackets later. Their income before any conversion: a $30,000 pension, $40,000 in IRA withdrawals for spending, $15,000 in dividends, and $10,000 in capital gains.

Baseline MAGI: $30,000 + $40,000 + $15,000 + $10,000 = $95,000. Net investment income: $25,000. MAGI is far below $250,000, so the NIIT is zero.

Their advisor models a $180,000 conversion this year as part of a multi-year bracket management plan.

New MAGI: $95,000 + $180,000 = $275,000. Threshold excess: $275,000 minus $250,000 = $25,000. Net investment income: still $25,000. The conversion added nothing to NII. The tax: 3.8% of the lesser of $25,000 or $25,000, which is $950.

Every dollar of dividends and gains Mark and Susan already owned is now exposed to the surtax, even though the conversion itself will never appear on Form 8960. The $950 is a real cost of the conversion and belongs in the conversion analysis next to the ordinary income tax.

The NIIT is not the expensive threshold in this story. Because Mark and Susan are 63, this year’s MAGI sets their Medicare premiums at 65 under the two-year lookback. At $275,000, they land $1,000 into the second surcharge tier (using the 2026 brackets, which run from $274,001 to $342,000 for joint filers, as an illustration; the brackets that will actually apply are published for the premium year and adjust annually for inflation). Converting $2,000 less, $178,000 instead of $180,000, would hold them at $273,000: still a working conversion plan, $76 less NIIT, and roughly $3,473 less in Medicare surcharges for the couple for that premium year. A $2,000 sizing decision moves the total cost by more than $3,500.

Because of the uncertainty of future IRMAA brackets, being a bit conservative here is typically well-advised. The two thresholds also have different shapes. The NIIT excess builds gradually, but Medicare surcharge tiers are true cliffs: one dollar of MAGI over a tier line buys the full tier for both spouses for a full year. Conversion sizing should be tested against both geometries, not just the ordinary income brackets.

Advisor takeaway: A Roth conversion never shows up in net investment income, but it raises MAGI dollar for dollar, exposing the client’s existing dividends and gains to the 3.8% surtax. Price the conversion against every ceiling that binds in that year: the target ordinary bracket, the NIIT threshold, and, for clients 63 and older, the Medicare MAGI tier they can stay under.

The threshold stack: one dollar, three tax systems

Retirement tax planning would be manageable if each threshold could be managed on its own. It cannot. The NIIT, Medicare’s income-related monthly adjustment amount (IRMAA, the premium surcharge keyed to MAGI with a two-year lookback), and the Social Security taxation formula all read from the same underlying income, and a single decision can trip all of them in one year.

Here is the stack for a married couple filing jointly in 2026:

Threshold	Where it sits (2026, married filing jointly)	Indexed for inflation?	What crossing it costs
Social Security provisional income	$32,000 base, $44,000 second tier	No, fixed since 1984 and 1994	Each added dollar drags up to $0.85 of benefits into taxable income
Enhanced senior deduction phase-out (2025 through 2028)	Begins at $150,000 of MAGI	Phase-out start is fixed	Deduction of $6,000 per person 65+ shrinks by 6% of MAGI above the line
Medicare surcharge, first tier	$218,001 of MAGI, applied with a two-year lookback	Yes, adjusts annually	$2,297 per couple per year at the first tier, more at each of five tiers
Net investment income tax	$250,000 of MAGI	No, fixed since 2013	3.8% of exposed net investment income

Sources: IRS, Questions and Answers on the Net Investment Income Tax; IRS newsroom, Social Security taxability and senior deduction pages; CMS, 2026 Medicare Parts A and B premiums and deductibles; surcharge dollar amounts from the CMS 2026 figures.

The four thresholds bite at four different altitudes. Provisional income punishes moderate incomes. The senior deduction phase-out and the Medicare tiers own the middle. The NIIT tops the ladder, and because its threshold never moves while the Medicare tiers adjust upward each year, the gap between them narrows. These are the same dollars being measured four ways.

The moderate-income version: the tax torpedo

For clients well below the NIIT threshold, the stack still fires, just through a different formula. Provisional income is AGI without Social Security, plus tax-exempt interest, plus half of the year’s Social Security benefits (the IRS calls this “combined income” under IRC Section 86; note that the benefit itself is excluded from the AGI base so nothing is double-counted). The base amounts, $32,000 and $44,000 for joint filers, have never been adjusted for inflation.

Take a couple with $44,000 in Social Security benefits and $30,000 in IRA withdrawals. Provisional income is $30,000 plus $22,000, or $52,000, which makes $12,800 of their benefits taxable. Now they take one extra $10,000 IRA withdrawal for a roof. Provisional income rises to $62,000 and taxable benefits jump to $21,300. The roof withdrawal added $10,000 of income, but taxable income rose by $18,500. In the 12% bracket, the tax on that withdrawal is $2,220, an effective marginal rate of 22.2%. Advisors call this the “tax torpedo,” and it is the low-altitude sibling of the NIIT hinge: a frozen threshold converting ordinary decisions into outsized marginal rates. Note that municipal bond interest, invisible to the NIIT, counts fully in this formula. For the full provisional income formula, the worked math at every benefit tier, and how the resulting tax actually gets paid, see the guide to how Social Security is taxed.

Scenario 3: RMDs consume the runway

Robert and Diane, both 74, no longer have a conversion window; required minimum distributions decide their MAGI floor for them. Their income: $110,000 in combined RMDs, $70,000 in Social Security benefits (of which $59,500 is taxable), a $45,000 pension, $28,000 in dividends, and $42,000 in capital gains from rebalancing.

MAGI: $110,000 + $59,500 + $45,000 + $28,000 + $42,000 = $284,500. Net investment income: $28,000 + $42,000 = $70,000. Threshold excess: $284,500 minus $250,000 = $34,500. NIIT: 3.8% of the lesser of $70,000 or $34,500, which is $1,311.

Look at the structure of that answer. Not one dollar of the RMDs, Social Security, or pension is net investment income, yet those three sources total $214,500 and consume nearly all of the couple’s $250,000 runway. Their investment income stacks on top, from $214,500 to $284,500, so $34,500 of it pokes above the threshold. Every year their RMDs grow, more of the same dividends and gains become exposed without the portfolio changing at all. Their $284,500 MAGI also lands in the second Medicare surcharge tier, which at 2026 rates costs $5,770 per couple for the premium year set by this year’s lookback.

Robert and Diane already give roughly $30,000 a year to their church and a donor-advised scholarship fund, writing checks from their taxable account. Routing that giving through Robert’s IRA as a qualified charitable distribution (QCD) instead changes the math structurally. A QCD, available from IRAs starting at age 70½ and capped at $111,000 per person in 2026 (adjusted for inflation), counts toward the RMD but never enters AGI.

With a $30,000 QCD: MAGI falls to $254,500. Threshold excess falls to $4,500, and the NIIT falls to $171, saving $1,140. The MAGI drop also moves them from the second Medicare tier down to the first, saving another $3,473 per couple at 2026 rates. The same $30,000 of generosity, routed through the IRA instead of the checkbook, is worth about $4,600 in surtax and surcharge relief in a single year. Deducting the gifts could not have done this work, because the NIIT and the Medicare surcharge are keyed to MAGI, which itemized deductions never touch. OBBBA’s new 0.5% of AGI floor on itemized charitable deductions only widens the QCD’s advantage.

One decision, priced against the whole tax stack

Now consider the centerpiece case. A married couple, both 66, has a baseline MAGI of $210,000, including $20,000 of dividends and capital gains. They are weighing two ways to move $100,000 this year: realize a $100,000 long-term gain to fund a home purchase, or convert $100,000 of IRA money to Roth. At $210,000 of MAGI they owe no surtax and no Medicare surcharge. Either move takes MAGI to $310,000. Here is what crossing costs, priced against the full stack:

Threshold crossed	The $100,000 gain	The $100,000 Roth conversion
NIIT (MAGI $250,000 threshold)	NII becomes $120,000; excess is $60,000; tax = 3.8% x $60,000 = $2,280	NII stays $20,000; excess is $60,000; tax = 3.8% x $20,000 = $760
Medicare surcharge (from below $218,001 to the $274,001-$342,000 tier, two-year lookback, 2026 brackets as illustration)	$5,770 per couple for the premium year	$5,770 per couple for the premium year
Enhanced senior deduction (phases out at 6% of MAGI above $150,000)	Remaining deduction eliminated	Remaining deduction eliminated
Social Security taxation	Already at the 85% maximum at this income; no further damage	Same

The two options carry the same $100,000 and the same MAGI, but the NIIT treats them differently: the gain is itself net investment income, so $60,000 is exposed; the conversion leaves only the couple’s existing $20,000 of NII exposed. Meanwhile the Medicare surcharge and the senior deduction phase-out are indifferent to the distinction, and both moves skip the first surcharge tier entirely, landing in the second. (The headline taxes differ too: the gain is taxed at capital gains rates, where exposed dollars face 15% plus 3.8%, an 18.8% combined rate, while the conversion is taxed at ordinary rates. The stack sits on top of both.)

This is why single-threshold thinking fails. An advisor optimizing the NIIT alone would call the conversion the cheaper move by $1,520. An advisor pricing the whole stack sees $8,050 of threshold costs on the gain path and $6,530 on the conversion path, before counting the lost deduction, and asks a better question: does this decision need to happen in one tax year at all? Split across two years, $50,000 at a time, the couple’s MAGI peaks at $260,000, and the honest accounting has three lines. The NIIT on the gain path drops from $2,280 to $760 in total, saving $1,520. The Medicare surcharge saving is real but smaller than the tier gap suggests: the split pays the first tier in two premium years, $2,297 per couple each year for $4,594 in total, against one year at the second tier ($5,770) and a second year with no surcharge at all, a net saving of $1,176. And the split costs the enhanced senior deduction in both years, because $260,000 of MAGI sits past the end of the phase-out range each time, while the single-year move gives the deduction back in the off year; for this couple, that is roughly $1,100 of extra tax. The split still wins, by about $1,600 net, but it wins on the full arithmetic, not on the flattering version where every threshold improves at once. For many clients, the calendar is the single most powerful tax tool they own.

Advisor takeaway: Before any large gain, conversion, or one-time withdrawal, map the client’s full threshold ladder for that year: provisional income if they are moderate-income, the senior deduction phase-out through 2028, the Medicare MAGI tiers if they are 63 or older, and the NIIT line. The right answer frequently changes when the decision is priced against all four at once, and the two-year Medicare lookback means the client will not see the most expensive consequence until it cannot be undone.

For the complete 2026 Medicare tier detail, see the 2026 IRMAA brackets guide. Two notes on those MAGI tiers belong here: single-filer thresholds are exactly half the joint thresholds except for the top threshold, and Medicare’s appeal process recognizes only life-changing events such as retirement, divorce, or the death of a spouse. A Roth conversion is not a life-changing event, so a surcharge triggered by conversion income cannot be appealed. The client sees the bill two years after the decision, and by then nothing can be done about it. That invisibility plus irreversibility is why the lookback belongs in the conversion conversation, not the tax-prep postmortem.

How to reduce net investment income tax exposure

There is no NIIT loophole, and clients searching for how to avoid the net investment income tax usually find lists that ignore the stack. The honest framing is that every reliable lever works on one of two variables, NII or MAGI, and the best levers move both. Here are seven that carry real weight for retirees, roughly in order of how often they apply:

1. Manage the calendar first. Gain splitting (Scenario 1) and conversion sizing (Scenario 2) cost nothing and routinely save four figures. Multi-year MAGI management is the discipline of deciding which tax year absorbs which income, and it beats every product-based idea on this list.
2. Use qualified charitable distributions for giving clients are already doing. For clients 70½ and older, QCDs from IRAs reduce MAGI directly, which deductions cannot do (Scenario 3). This is frequently the largest single-year lever for RMD-age clients.
3. Harvest losses against harvested gains. Capital losses reduce net gain dollar for dollar, shrinking NII and MAGI at once. A year with a large planned gain is the year the loss inventory earns its keep.
4. Put income in the right accounts. Asset location moves interest, non-qualified dividends, and REIT income into tax-deferred accounts where they compound without creating annual NII. It is a slow lever, but it permanently shrinks the investment income the surtax can reach.
5. Convert to Roth deliberately during the window, not reflexively. Conversions raise MAGI now (Scenario 2) to shrink RMDs later (Scenario 3). For many clients the trade is excellent; the discipline is pricing this year’s full stack cost, including the Medicare lookback for clients 63 and older, against the future RMD relief.
6. Respect the Section 121 exclusion. The first $250,000 of gain on a principal residence ($500,000 for joint filers) touches neither NII nor MAGI. Gain above the exclusion is fully both. Model home sales before the listing, not after.
7. Use municipal bonds with clear eyes. Muni interest escapes both NIIT variables, which makes it genuinely useful above the threshold. For moderate-income clients, remember that provisional income counts it anyway; a muni ladder can raise the taxable share of Social Security while solving a surtax problem the client did not have.

State taxes deserve a mention as the stack’s shadow: several states tax retirement income under their own non-indexed rules, and the state taxes in retirement guide covers which states compound the federal math.

What does not work: hoping the thresholds move. They have not moved in thirteen years, no current law changes them, and every year of inflation drafts more of an advisor’s ordinary clients into the tax.

Where this fits in a real plan

Threshold math is easy to demonstrate in an article and hard to run by hand across a thirty-year plan, five income sources, and a conversion schedule, because every year’s decision changes the next year’s floor. This is software work, and it only works when the tax engine is connected to a full financial plan rather than bolted onto a single year’s return.

Income Lab’s Tax Lab runs this analysis inside the plan itself, and it makes the sizing question visual. Set up Mark and Susan from Scenario 2: the income graph shows the $180,000 conversion stacking on top of their pension, withdrawals, and gains inside the year’s brackets; the Medicare view lays out conversion scenarios tier by tier, with the estimated surcharge cost at each level and the two-year MAGI lookback projected forward; and the engine runs 20 distribution strategies simultaneously, computing federal ordinary and capital gains taxes, the net investment income tax, and state and local tax in every one.

Tax Lab is one of the parts of Income Lab that is second to none in the full lifecycle of financial planning. It models the plan the way current law actually works: Medicare tiers and ordinary brackets adjust with inflation in future projections while the NIIT and Social Security taxability thresholds stay fixed in nominal dollars, which is precisely the widening trap this article describes. For multi-year sequencing of MAGI around these cliffs, including scheduled law changes like the senior deduction’s expiration after 2028, see the Roth conversion strategy guide and the Roth conversion and Medicare planning guide.

FAQ

What is the net investment income tax?

The net investment income tax is a 3.8% federal surtax on investment income for taxpayers whose modified adjusted gross income exceeds $200,000 (single filers) or $250,000 (married filing jointly). The tax applies to the lesser of net investment income or the MAGI amount above the threshold, and it is reported on IRS Form 8960. It took effect in 2013 and its thresholds have never been adjusted for inflation.

What is the NIIT threshold for 2026?

For 2026, the NIIT thresholds are unchanged from 2013: $250,000 of MAGI for married couples filing jointly and qualifying surviving spouses, $200,000 for single filers and heads of household, and $125,000 for married taxpayers filing separate returns. The thresholds are statutory and not indexed for inflation, per the IRS. Trusts and estates face the tax at just $16,000 of income in 2026.

Are IRA withdrawals and RMDs subject to the net investment income tax?

No. Distributions from qualified retirement plans, including traditional and Roth IRAs, 401(k)s, 403(b)s, and 457(b) plans, are excluded from net investment income under the Form 8960 rules. But taxable distributions, including required minimum distributions, raise MAGI dollar for dollar, which can expose a client’s dividends and capital gains to the 3.8% tax even though the withdrawal itself never faces that rate.

Does a Roth conversion count as net investment income?

No, and this is the most misunderstood interaction in the surtax. Roth conversion income is excluded from net investment income, so the converted dollars never face the 3.8% rate. The conversion does raise MAGI, however, which can push existing interest, dividends, and gains above the threshold and create an NIIT bill in the conversion year. The conversion also counts toward the MAGI that sets Medicare premiums two years later for clients 63 and older.

How do you avoid the net investment income tax?

There is no way around the tax for income that is genuinely exposed, but retirees control exposure more than most taxpayers. The reliable levers: split large gains across tax years, size Roth conversions against the threshold, use qualified charitable distributions from IRAs after age 70½ to reduce MAGI, harvest losses in high-gain years, hold income-heavy assets in tax-deferred accounts, and stay within the Section 121 exclusion on home sales. Timing beats products; much of the NIIT savings comes from moving dates, not money.

Does the NIIT apply when you sell your house?

Usually not. Gain on a principal residence that falls within the Section 121 exclusion, the first $250,000 for a single filer or $500,000 for a married couple filing jointly, is excluded from gross income and is not subject to the net investment income tax, per the IRS. However, gain above the exclusion is net investment income and also raises MAGI, so a large home sale can create both the income and the threshold crossing in a single year.

Did the One Big Beautiful Bill Act change the net investment income tax?

No. OBBBA, signed in July 2025, left the NIIT untouched for 2026: the rate is still 3.8% and the thresholds remain $200,000 and $250,000, unindexed. It did add a nearby threshold, the $6,000-per-person enhanced deduction for seniors 65 and older (2025 through 2028), which phases out at 6% of MAGI above $75,000 single or $150,000 joint and reacts to the same gains, conversions, and withdrawals that drive NIIT exposure.

Sources

• Internal Revenue Service: Net Investment Income Tax
• Internal Revenue Service: Questions and Answers on the Net Investment Income Tax
• Internal Revenue Service: Instructions for Form 8960
• Internal Revenue Service: IRS reminds taxpayers their Social Security benefits may be taxable
• Internal Revenue Service: Check your eligibility for the new enhanced deduction for seniors
• Internal Revenue Service: Rev. Proc. 2025-32, 2026 inflation adjustments
• Congressional Research Service: The 3.8% Net Investment Income Tax: Overview, Data, and Policy Options (IF11820)
• Centers for Medicare & Medicaid Services: 2026 Medicare Parts A & B Premiums and Deductibles
• Tax Foundation: The OBBBA Senior Deduction Is Poorly Targeted Tax Relief

The net investment income tax will never be the biggest number in a retirement plan. It earns its place in the plan review because it is a frozen threshold sitting inside a stack of them, and because the clients most likely to trip it are the ones doing everything else right: converting during the window, rebalancing on schedule, taking their RMDs. Every scenario in this article turned on a date, a size, or a routing decision made before year-end. To see the threshold stack calculated on one real household, with this year’s gain or conversion sized against every ceiling at once, Book a Walkthrough.