Taxes can quietly cut into your investment returns without you even noticing. The 3.8% NIIT affects everything from interest and dividends to capital gains. It applies on top of regular income and capital gains taxes, not instead of them.  Understanding this tax and taking a few smart steps can help you keep more of your money in 2026.

Why This Matters

Even a small 3.8% tax can add up over time and significantly affect investment returns, especially during years with large gains or income spikes. By understanding how NIIT works and taking proactive steps, you can preserve more of your investment income, reduce unexpected tax bills, and make your portfolio more tax-efficient in 2026.

What is the Net Investment Income Tax (NIIT)?

The NIIT is a 3.8% tax on investment income for higher-income taxpayers. You only pay it on the smaller of:

• The money you earn from investments (interest, dividends, capital gains, etc.), or
• The amount your income exceeds IRS limits for your filing status.

Who Pays the NIIT?

The Net Investment Income Tax (NIIT) applies to both individuals and certain estates or trusts that meet income and investment thresholds:

• Individuals: U.S. citizens and resident aliens must pay the NIIT if their modified adjusted gross income (MAGI) exceeds IRS thresholds and they have net investment income. For the 2025 tax year (returns filed in 2026), the thresholds are:
  • $250,000 — Married Filing Jointly
  • $125,000 — Married Filing Separately
  • $200,000 — Single or Head of Household
    Non-resident aliens are generally not subject to the NIIT unless they choose to file jointly with a U.S. spouse.
• Estates and Trusts: These entities owe the NIIT if they have both undistributed net investment income and adjusted gross income (AGI) above the top-bracket threshold. For 2026, that threshold is $16,000. Certain trusts, including grantor trusts and perpetual care trusts, remain exempt.

What Counts as Net Investment Income?

NII includes interest, dividends, capital gains, income from annuities, rental and royalty income and passive business income.

NII does not include: wages, self-employment income, non-passive business income, Social Security benefits, tax-exempt interest or distributions from qualified retirement plans.

This is where many business owners and real estate investors are surprised. Passive rental income and certain K-1 income can be subject to NIIT, even though it often feels like earned income.

Example:

To see how this works in practice, consider Jane, a single investor with $250,000 in MAGI and $50,000 in dividends. She would pay 3.8% NIIT on the smaller of her net investment income ($50,000) or the amount over the threshold ($50,000). That equals $1,900 in additional tax. With some proactive planning, she could potentially reduce or avoid this extra tax.

What are some ways to reduce NIIT?

1. Think strategically about gains and losses. Your investments’ appreciation usually isn’t taxed as part of net investment income until you actually sell them. That means you can minimize NIIT by timing sales carefully, ideally in a year when you also have capital losses to offset the gains. Already had a big year with gains? Look for unrealized losses in your portfolio and consider selling those by December 31 to help balance things out.
2. Make the most of retirement accounts. Contributing to traditional pretax or deductible retirement plans can lower your MAGI, which may reduce (or even eliminate) your NIIT for the year. Roth accounts work a bit differently: contributions aren’t deductible, but qualified withdrawals won’t count toward MAGI, which can help minimize NIIT down the line. Either way, keeping investments in retirement accounts lets them grow tax-deferred (or tax-free with a Roth) so the interest and dividends don’t push you closer to NIIT thresholds. For retirees, required minimum distributions increase MAGI even though they aren’t net investment income. That higher income can indirectly trigger NIIT on investment income that otherwise wouldn’t be taxed, making coordinated withdrawal planning especially important.
3. Consider municipal bonds. Interest from municipal bonds isn’t counted when calculating MAGI, so investing in them can help you stay below the NIIT threshold. Plus, that interest isn’t part of your net investment income, so it’s essentially shielded from the 3.8% tax.