The 3.8% Net Investment Income Tax grew substantially between 2013 and 2021: annual collections rose from $16.5 billion in 2013 to $59.8 billion in 2021 (preliminary), and the number of taxpayers paying it more than doubled from 3.1 million to 7.3 million, even though its entry thresholds have never moved from $200,000 and $250,000 (Source: Congressional Research Service, IF11820, updated June 30, 2023).
NIIT by the numbers
- Tax rate: 3.8% on the lesser of net investment income or MAGI above the threshold (Source: IRS NIIT Q&A; 26 U.S.C. 1411(a)).
- Single / head-of-household threshold: $200,000, fixed since 2013 (Source: IRS Topic No. 559).
- Married-filing-jointly threshold: $250,000, fixed since 2013 (Source: IRS Topic No. 559; 26 U.S.C. 1411(b)).
- Revenue growth 2013 to 2021: +$43.3 billion ($16.5B to $59.8B preliminary) (Source: CRS IF11820, 2023).
- Taxpayers subject 2013 to 2021: 3.1M to 7.3M, a 135% increase (Source: CRS IF11820, 2023).
- Average NIIT paid, tax year 2019: $5,202 per subject taxpayer (Source: CRS IF11820, 2023).
- Real value of the $200,000 threshold in 2013 dollars, as of May 2026: $139,028 (Source: analyst calculation using BLS CPI-U, CPIAUCNS).
- Concentration: taxpayers with income of $10M or more paid 31.5% of all NIIT in tax year 2019 (Source: CRS IF11820, 2023).
NTERI measures how far the NIIT has expanded since its 2013 inception by combining a “Reach” leg (nominal revenue and taxpayer growth) with an “Erosion” leg (real loss of purchasing-power protection in the never-indexed thresholds). Headline value: 3.81x as of May 2026 (3.67x using 2024 inflation data). Methodology: Reach subscore (geometric mean of the 3.62x revenue and 2.35x taxpayer multiples = 2.92x) multiplied by (1 + Erosion subscore of 30.5% real erosion of the $200,000 threshold). This is an analyst construct built from CRS/IRS revenue counts and BLS CPI-U index ratios, not a standard government statistic.
What the Net Investment Income Tax is
The Net Investment Income Tax (NIIT) is a 3.8% federal surtax created by the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152) and effective for tax years beginning after December 31, 2012, meaning it first applied in 2013 (Source: CRS IF11820, 2023; 26 U.S.C. 1411). It is codified at Internal Revenue Code Section 1411 and reported by individuals on Form 8960, which flows to Form 1040 (Source: IRS Instructions for Form 8960).
The statutory mechanic is precise. Under 26 U.S.C. 1411(a)(1), the tax equals “3.8 percent of the lesser of (A) net investment income for such taxable year, or (B) the excess (if any) of the modified adjusted gross income for such taxable year, over the threshold amount” (Source: 26 U.S.C. 1411(a); IRS NIIT Q&A). This “lesser of” test is the single most important feature to understand. A taxpayer with modest investment income but modified adjusted gross income (MAGI) only slightly above the threshold pays 3.8% on that small excess, not on all of their investment income. Conversely, a large one-time income event can expose far more.
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The fixed MAGI thresholds
The thresholds are fixed dollar amounts that have not changed since the tax took effect (Source: IRS NIIT Q&A; 26 U.S.C. 1411(b)):
| Filing status | MAGI threshold | Statutory basis |
|---|---|---|
| Single | $200,000 | IRS Q&A; 1411(b)(3) “other cases” |
| Head of household (with qualifying person) | $200,000 | IRS Q&A |
| Married filing jointly | $250,000 | 1411(b)(1) |
| Qualifying surviving spouse with dependent child | $250,000 | IRS Q&A; 1411(b)(1) |
| Married filing separately | $125,000 | 1411(b)(2), one-half of the joint amount |
Critically, IRC Section 1411 contains no inflation-adjustment provision. The Congressional Research Service states this explicitly: “The income thresholds are not indexed annually for inflation” (Source: CRS IF11820, 2023). CRS further notes that because of this, “more taxpayers become subject to the tax over time regardless of whether their real (inflation-adjusted) income has increased” (Source: CRS IF11820, 2023). This is the fiscal-drag mechanism at the heart of this briefing and of the NTERI index above.
MAGI, and why it matters more than you might think
For NIIT purposes, MAGI is adjusted gross income (Form 1040 line 11) increased by the excess of the Section 911(a)(1) foreign earned income exclusion over disallowed Section 911(d)(6) deductions (Source: 26 U.S.C. 1411(d); IRS Instructions for Form 8960, Line 13 MAGI Worksheet). For taxpayers with no foreign earned income exclusion, MAGI simply equals AGI. This matters because the MAGI worksheet does not subtract retirement plan or IRA distributions, or Roth conversion income, from AGI. Income that is not itself investment income can still push MAGI over the threshold and thereby expose separately held investment income to the surtax.
What counts as net investment income
The inclusions and exclusions determine everything. The IRS NIIT Q&A and the parallel statute at 1411(c) list the categories.
| Included in net investment income | Excluded from net investment income |
|---|---|
| Interest | Wages |
| Dividends | Unemployment compensation |
| Capital gains | Operating income from a non-passive business |
| Rental and royalty income | Social Security benefits |
| Non-qualified annuities | Alimony |
| Income from businesses trading financial instruments or commodities | Tax-exempt interest |
| Income from passive-activity businesses | Self-employment income |
| Capital gain distributions from mutual funds | Alaska Permanent Fund Dividends |
| Gain on sale of investment or second-home real estate | Distributions from qualified plans under IRC 401(a), 403(a), 403(b), 408, 408A, 457(b) |
The retirement-plan exclusion is statutory: 26 U.S.C. 1411(c)(5) provides that net investment income “shall not include any distribution from a plan or arrangement described in section 401(a), 403(a), 403(b), 408, 408A, or 457(b)” (Source: 26 U.S.C. 1411; IRS NIIT Q&A). Self-employment income is excluded because amounts subject to SE tax under Section 1401(b) are carved out by 1411(c)(6). Gain excluded under Section 121 on the sale of a principal residence is also outside net investment income (Source: IRS NIIT Q&A).
The long revenue and returns trend
Two distinct government data series exist and must not be blended. The IRS Statistics of Income (SOI) individual-return series, drawn from Form 8960 totals in Publication 1304, covers individuals only. The CRS/IRS aggregate series reported in IF11820 is larger because it reflects a broader base (individuals plus estates and trusts) and later, fuller data pulls. The two agree closely at the 2013 starting point but diverge in later years.
Series A: IRS SOI individual returns (Form 8960)
The following figures come from the IRS Statistics of Income Division, Individual Income Tax Returns Complete Report (Publication 1304), Table A and report narratives, cross-verified across consecutive editions.
| Tax year | Returns (thousands) | NIIT ($ millions) | NIIT ($ billions) |
|---|---|---|---|
| 2013 | 3,090 | 16,491 | $16.5B |
| 2014 | 3,591 | 22,480 | $22.5B |
| 2015 | 3,829 | 22,043 | $22.0B |
| 2016 | 3,854 | 19,451 | $19.5B |
| 2017 | 4,490 | 25,324 | $25.3B |
| 2019 | 5,433 | 28,259 | $28.3B |
| 2020 | 5,692 | 35,358 | $35.4B |
(Source for all rows: IRS SOI, Publication 1304, Table A and narratives, editions 2014 through 2022.) The SOI narratives record the year-over-year swings directly: the amount rose 36.3% in 2014, fell 1.9% in 2015, fell 11.8% in 2016, rose 30.2% in 2017, and rose 25.1% in 2020 to $35.4 billion on 5.7 million returns. The 2018 SOI figure could not be cleanly separated from the 2017 figure in the Table A layout (both round to roughly $25.3 billion on 4.5 million returns), so it is shown as unresolved rather than as a distinct value.
Series B: CRS/IRS aggregate
The CRS aggregate series in IF11820 reports two endpoints: tax year 2013 at $16.5 billion on 3.1 million taxpayers, and tax year 2021 at $59.8 billion (preliminary) on 7.3 million taxpayers (Source: CRS IF11820, 2023). That is a $43.3 billion increase in revenue (not inflation-adjusted) and a gain of 4.2 million taxpayers over the eight-year span. CRS attributes the growth partly to the non-indexed thresholds and partly to real increases in net investment income.
Who pays: distribution in tax year 2019
CRS IF11820 provides a distributional snapshot for tax year 2019 (Source: CRS IF11820, 2023):
| Income group | Share of NIIT-subject taxpayers | Share of total NIIT paid | Average NIIT |
|---|---|---|---|
| $200,000 to $500,000 | 69.6% | 14.1% | $1,054 |
| $10 million or more | Small share of returns | 31.5% | $449,642 |
| All NIIT-subject taxpayers | 100% | 100% | $5,202 |
The pattern is a barbell. Most people who pay the NIIT sit in the $200,000 to $500,000 band and pay small amounts (average $1,054), while a very small number of very-high-income filers account for a disproportionate share of the dollars. That structure connects directly to why threshold non-indexation matters: as inflation erodes the real value of the fixed $200,000 entry point, more taxpayers have crossed the fixed thresholds over time as incomes have risen.
The threshold-erosion story
Because the $200,000, $250,000, and $125,000 thresholds have never been indexed, inflation alone has shrunk their real value. The following figures are analyst calculations applying BLS Consumer Price Index for All Urban Consumers (CPI-U, series CPIAUCNS, 1982-84=100) index ratios to the statutory nominal thresholds. The underlying BLS index values are the primary data: 2013 annual average = 232.957; 2024 annual average = 313.689; May 2026 (latest month) = 335.123 (Source: FRED/BLS CPIAUCNS). Cumulative inflation from 2013 to 2024 was 34.7%; from 2013 to May 2026 it was 43.9%.
| Threshold (nominal, fixed) | Real value in 2013 dollars, as of 2024 | Real value in 2013 dollars, as of May 2026 | Real erosion by May 2026 |
|---|---|---|---|
| $200,000 (single/HoH) | $148,527 | $139,028 | 30.5% |
| $250,000 (MFJ) | $185,659 | $173,785 | 30.5% |
| $125,000 (MFS) | $92,830 | $86,892 | 30.5% |
Put the other way around, to preserve their 2013 real value the thresholds would need to be substantially higher today (Source: analyst calculation using BLS CPI-U):
| Threshold | Inflation catch-up value (2024 dollars) | Inflation catch-up value (May 2026 dollars) |
|---|---|---|
| $200,000 | $269,311 | $287,712 |
| $250,000 | $336,638 | $359,640 |
| $125,000 | $168,319 | $179,820 |
A methodological caveat: a clean 2025 CPI-U annual average is not available because the October 2025 CPI-U index was not published during the 2025 lapse in appropriations (Source: BLS, 2025 Federal Government Shutdown Impact on CPI). This briefing therefore uses the verified 2024 annual average and the latest verified monthly index (May 2026).
The NTERI composite, explained
The NIIT Threshold-Erosion & Reach Index (NTERI) is a Q3 Advisors analyst construct that combines the two forces above into a single directional reading. The Reach leg captures nominal expansion: revenue grew 3.62x (from $16.5B to $59.8B, a 262.4% nominal increase) and taxpayers grew 2.35x (from 3.1M to 7.3M, a 135.5% increase) over 2013 to 2021, and revenue per taxpayer rose from about $5,323 to about $8,192, up 53.9% (Source: CRS IF11820, 2023; per-capita figures are analyst calculations from those totals). The geometric mean of the two growth multiples is 2.92x. The Erosion leg is the 30.5% real erosion of the $200,000 threshold as of May 2026. The composite, Reach x (1 + Erosion), equals 3.81x as of May 2026 and 3.67x using 2024 inflation data.
Interpretation, stated plainly: since 2013 the NIIT has expanded its reach roughly 3.8-fold when nominal base growth is combined with real threshold erosion. Limitations are important. The revenue and taxpayer inputs are the CRS aggregate series and must not be blended with the SOI individuals-only series. The Reach leg spans 2013 to 2021 while the Erosion leg spans 2013 to 2024 or May 2026, so the composite mixes horizons and is an index, not a same-period elasticity. The 2021 revenue figure is preliminary, and because nominal growth is not inflation-adjusted, part of the Reach leg conceptually overlaps with the Erosion leg. The subscores are more interpretable individually than the single headline number.
Retirement scenarios: how the NIIT actually bites
The exclusion of retirement-plan distributions from net investment income is easy to misread. Those distributions are not investment income, but they still raise AGI and therefore MAGI, and the Form 8960 MAGI worksheet does not back them out. That interaction produces several scenarios. These are illustrative mechanics, not recommendations.
Scenario 1: Roth conversion
Converting a traditional IRA to a Roth is reported as taxable income on Form 1040 line 4b. The conversion dollars themselves are never subject to NIIT, because distributions from Section 408A arrangements are excluded from net investment income under 1411(c)(5). But the conversion increases AGI and thus MAGI, and it is not subtracted in the MAGI worksheet. A large conversion can push MAGI over the threshold and expose the taxpayer’s other investment income (interest, dividends, capital gains) to the 3.8% surtax that year (Source: IRS NIIT Q&A; IRS Instructions for Form 8960; 26 U.S.C. 1411(c)(5),(d)). The timing of a multi-year conversion can affect how it interacts with the surtax; see the discussion of the retirement tax window and Roth conversion planning.
Scenario 2: IRA and 401(k) distributions
The same mechanic applies to ordinary distributions from 401(a), 403(b), 408, and 457(b) plans. They are excluded from net investment income but raise AGI and MAGI and are not backed out, so they can lift MAGI above the threshold and subject separately held investment income to the NIIT (Source: 26 U.S.C. 1411(c)(5),(d); IRS Instructions for Form 8960).
Scenario 3: a large capital gain or asset sale
Capital gains are net investment income and they raise MAGI, so a large asset sale can both create net investment income and push MAGI over the threshold in the same year, a double effect (Source: IRS NIIT Q&A). Capital gain distributions from mutual funds and gain on the sale of investment real estate, including a second home that is not a primary residence, are within the tax.
Scenario 4: selling a principal residence
The NIIT does not apply to gain excluded from gross income for regular tax. IRC Section 121 excludes the first $250,000 of gain for a single filer and $500,000 for a married couple on the sale of a principal residence. Only gain above the Section 121 exclusion is potentially subject to the 3.8% surtax, and only if MAGI exceeds the threshold (Source: IRS NIIT Q&A).
Scenario 5: selling a pass-through interest
Gain on the sale of an interest in a partnership or S corporation is net investment income to the extent the owner was a passive owner (Source: IRS NIIT Q&A).
Scenario 6: Social Security and the surrounding tax web
Social Security benefits are not net investment income (Source: IRS NIIT Q&A; IRS Topic No. 559). But the taxable portion of benefits is part of AGI, which can lift MAGI toward the NIIT threshold. The NIIT does not operate in isolation; it sits alongside the taxation of Social Security benefits and Medicare IRMAA surcharges, all of which key off income measures in the same year. For surviving spouses, the shift to single filing (a $200,000 rather than $250,000 threshold) is one facet of what is often called the widow’s penalty.
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Frequently asked questions
What is the Net Investment Income Tax rate?
It is 3.8%, applied to the lesser of net investment income or the amount by which MAGI exceeds the applicable threshold (Source: IRS NIIT Q&A; 26 U.S.C. 1411(a)).
What are the 2026 NIIT thresholds?
The thresholds are $200,000 for single and head-of-household filers, $250,000 for married filing jointly and qualifying surviving spouse, and $125,000 for married filing separately. They have not changed since 2013 (Source: IRS Topic No. 559; 26 U.S.C. 1411(b)).
Are the NIIT thresholds indexed for inflation?
No. IRC Section 1411 contains no inflation adjustment, and CRS states that “the income thresholds are not indexed annually for inflation” (Source: CRS IF11820, 2023).
When did the NIIT take effect?
It was enacted by the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152) and applies to tax years beginning after December 31, 2012, so it first applied in 2013 (Source: CRS IF11820, 2023; 26 U.S.C. 1411).
What form is used to report the NIIT?
Individuals compute the tax on Form 8960 and report it on Form 1040 (Source: IRS Instructions for Form 8960).
Is the tax on all of my investment income?
No. It applies only to the lesser of your net investment income or the excess of your MAGI over the threshold. If your MAGI is only slightly above the threshold, the tax applies only to that small excess (Source: 26 U.S.C. 1411(a)).
What income counts as net investment income?
Interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses that trade financial instruments or commodities, and income from passive-activity businesses (Source: IRS NIIT Q&A).
What income is excluded?
Wages, unemployment compensation, non-passive business operating income, Social Security benefits, alimony, tax-exempt interest, self-employment income, Alaska Permanent Fund Dividends, and distributions from qualified plans under IRC 401(a), 403(a), 403(b), 408, 408A, and 457(b) (Source: IRS NIIT Q&A; 26 U.S.C. 1411(c)(5)).
Are retirement account distributions subject to the NIIT?
Distributions from qualified plans and IRAs are excluded from net investment income. However, they raise AGI and MAGI and can push MAGI over the threshold, exposing other investment income to the tax (Source: 26 U.S.C. 1411(c)(5),(d); IRS Instructions for Form 8960).
Does a Roth conversion trigger the NIIT?
The conversion dollars themselves are not net investment income and are not taxed by the NIIT. But the conversion increases MAGI, which can push you over the threshold and subject your other investment income to the 3.8% surtax (Source: IRS NIIT Q&A; 26 U.S.C. 1411(c)(5),(d)).
Is Social Security subject to the NIIT?
Social Security benefits are not net investment income. The taxable portion is still part of AGI, which affects MAGI (Source: IRS NIIT Q&A; IRS Topic No. 559).
Do capital gains count?
Yes. Capital gains are net investment income and also raise MAGI, so a large sale can both create the income and push MAGI over the threshold in the same year (Source: IRS NIIT Q&A).
Is the sale of my home subject to the NIIT?
Gain excluded under IRC Section 121 (up to $250,000 single, $500,000 married) is not net investment income. Only gain above that exclusion is potentially subject to the surtax, and only if MAGI exceeds the threshold (Source: IRS NIIT Q&A).
What is MAGI for NIIT purposes?
MAGI is AGI increased by the excess of the Section 911(a)(1) foreign earned income exclusion over disallowed Section 911(d)(6) deductions. For most taxpayers with no foreign earned income exclusion, MAGI equals AGI (Source: 26 U.S.C. 1411(d); IRS Instructions for Form 8960).
How much revenue does the NIIT raise?
Revenue rose from $16.5 billion in 2013 to $59.8 billion in 2021 (preliminary) per the CRS aggregate series (Source: CRS IF11820, 2023). The IRS SOI individuals-only series shows $35.4 billion for 2020 (Source: IRS SOI, Publication 1304, 2022).
How many people pay the NIIT?
The number of taxpayers subject to the tax rose from 3.1 million in 2013 to 7.3 million in 2021 (preliminary) (Source: CRS IF11820, 2023).
What is the average NIIT paid?
The average across all NIIT-subject taxpayers in tax year 2019 was $5,202 (Source: CRS IF11820, 2023).
Who pays most of the NIIT dollars?
Taxpayers with income of $10 million or more paid 31.5% of total NIIT in tax year 2019, with an average of $449,642 per such return, while taxpayers in the $200,000 to $500,000 band made up 69.6% of subject taxpayers but paid 14.1% of the total (Source: CRS IF11820, 2023).
How much has inflation eroded the $200,000 threshold?
Using BLS CPI-U, the $200,000 threshold was worth about $148,527 in 2013 dollars as of 2024 and about $139,028 as of May 2026, a real erosion of roughly 25.7% and 30.5% respectively (Source: analyst calculation using BLS CPI-U, CPIAUCNS).
What would the thresholds be if they had been indexed?
To hold their 2013 real value, the $200,000 threshold would be about $287,712, the $250,000 threshold about $359,640, and the $125,000 threshold about $179,820, in May 2026 dollars (Source: analyst calculation using BLS CPI-U).
Does the NIIT apply to estates and trusts?
Yes. For estates and trusts the tax applies at the AGI level where the highest trust and estate bracket begins, which was $15,650 for tax year 2025 (Source: IRS Topic No. 559). That figure changes annually.
Is tax-exempt interest subject to the NIIT?
No. Tax-exempt interest is not net investment income (Source: IRS NIIT Q&A).
What is the NTERI index?
The NIIT Threshold-Erosion & Reach Index is a Q3 Advisors analyst construct combining nominal revenue and taxpayer growth with real threshold erosion. Its headline value is 3.81x as of May 2026, built from CRS/IRS counts and BLS CPI-U ratios. It is a directional index, not a standard government statistic.
Sources
IRS, Questions and Answers on the Net Investment Income Tax, https://www.irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax .
IRS, Topic No. 559, Net Investment Income Tax, https://www.irs.gov/taxtopics/tc559 .
IRS, Instructions for Form 8960, https://www.irs.gov/instructions/i8960 .
IRS, Net Investment Income Tax, https://www.irs.gov/individuals/net-investment-income-tax .
IRS Statistics of Income Division, Individual Income Tax Returns Complete Report (Publication 1304), editions 2014-2022, https://www.irs.gov/statistics/soi-tax-stats-individual-income-tax-returns-complete-report-publication-1304 .
Legal Information Institute, 26 U.S.C. 1411, https://www.law.cornell.edu/uscode/text/26/1411 .
Congressional Research Service, “The 3.8% Net Investment Income Tax: Overview, Data, and Policy Options,” IF11820, updated June 30, 2023, https://www.congress.gov/crs-product/IF11820 (mirror: https://www.everycrsreport.com/reports/IF11820.html ).
U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers (CPIAUCNS), via FRED, https://fred.stlouisfed.org/series/CPIAUCNS ; BLS CPI release, https://www.bls.gov/news.release/cpi.nr0.htm ; BLS, 2025 Federal Government Shutdown Impact on CPI, https://www.bls.gov/cpi/additional-resources/2025-federal-government-shutdown-impact-cpi.htm .
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Disclaimer
This material is provided by Q3 Advisors, a registered investment adviser, for informational and educational purposes only. It is not investment, legal, or tax advice, nor a recommendation or solicitation to buy or sell any security or to adopt any strategy. Information is believed to be from reliable sources as of the dates cited, but its accuracy is not guaranteed and figures are subject to change. Past performance does not guarantee future results, and the value of investments can go down as well as up. Registration with the SEC or a state does not imply a certain level of skill or training. See Q3 Advisors’ Form ADV Part 2A for information on services, fees, and conflicts of interest. Readers should consult their own qualified tax, legal, or financial advisor before making any decisions.
