The net investment income tax is a 3.8% federal tax on the investment income of high earners.

People with net investment income pay the 3.8% net investment income tax once their modified AGI passes $200,000, or $250,000 on a joint return. The threshold is also $250,000 for a surviving spouse, $200,000 for head of household and $125,000 for a married person filing separately. The tax is 3.8% of the smaller of your net investment income and your modified AGI above the threshold. Most estates and nongrantor trusts pay it too, above $16,000 of AGI for 2026.

Net investment income is interest, dividends, capital gains, rents, royalties and annuities, minus the expenses that go with them. It includes gains on a second home or on most rentals, and income from a pass-through business you do not materially participate in. It also covers income from a business trading securities or commodities. Wages, self-employment income, Social Security and payouts from a 401(k) or IRA do not count. Nor do tax-exempt interest and the home-sale gain you exclude.

NIIT does not apply to RSU income, because it is taxed as wages. That income still raises your modified AGI, which decides whether the tax reaches your other investment income. A later gain on selling the shares is net investment income. On a home sale, gain within the exclusion is exempt: up to $250,000, or $500,000 for a married couple who file jointly and qualify. Gain above that amount is net investment income, and so is all the gain on a second home.

You can reduce NIIT by keeping income out of its reach or by spreading a large gain over several years. Material participation in a business, such as working in it over 500 hours a year, takes its operating income out of the tax. Rentals and securities or commodities trading follow different rules. Tax-exempt bond interest is left out of both net investment income and modified AGI, though private activity bonds can raise the alternative minimum tax. Deferring pay into a pre-tax 401(k) lowers your modified AGI. To spread a gain, you can use an installment sale or a charitable remainder trust.

You owe the net investment income tax because your modified AGI passed your threshold while you had investment income. A single large event, such as a home sale or an RSU vest, can push you over. The thresholds are not indexed for inflation, so a rising salary can do the same. No employer withholds this tax, so it often shows up as a balance due when you file. You can cover it with estimated payments, or by asking your employer to withhold more income tax.

The 3.8% tax on net investment income is a federal surtax under Section 1411, added to your regular income tax. On long-term gains and qualified dividends, it comes on top of the 0%, 15% or 20% rate. At the 20% rate, the total federal rate is 23.8%. It is often called the 3.8% Medicare surtax, but it is separate from the 0.9% Additional Medicare Tax on earnings. You figure it on Form 8960 and attach it to your tax return.