The 3.8 Percent Net Investment Income Tax for Owners
Which income the surtax reaches, why active business income is outside it, how the sale of a business is treated, and the thresholds that have never moved.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
The net investment income tax is a 3.8 percent surtax on interest, dividends, capital gains, rents, royalties, and income from businesses you do not materially participate in, for taxpayers with modified adjusted gross income above $200,000 (single) or $250,000 (married filing jointly). The thresholds are not indexed; income from a business you actively run is outside it.
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What income is subject to the tax?
| Income | Subject to the surtax? |
|---|---|
| Interest, dividends, annuities, royalties | Yes |
| Capital gains on stocks, funds, real estate | Yes |
| Rental income | Yes, unless you qualify as a real estate professional who materially participates |
| Pass-through income from a business you materially participate in | No |
| Pass-through income from a passive investment in a business | Yes |
| S corporation distributions to an active owner | No |
| Self-employment income | No (subject to self-employment tax instead) |
| Retirement plan and IRA distributions | No |
| Gain on sale of a business you actively ran | Generally no, to the extent of active assets |
| Gain on sale of a passive business interest | Yes |
The tax applies to the lesser of net investment income or the amount by which modified adjusted gross income exceeds the threshold.
Why does material participation matter?
The same tests used for the passive activity rules decide whether business income is investment income for this purpose — more than 500 hours a year is the most common. An owner who steps back from the business and keeps the ownership can find profit that was never subject to the surtax suddenly is.
How is the sale of a business treated?
Gain on the sale of an interest in a partnership or S corporation is tested as if the entity sold its assets: the portion attributable to assets used in an active business in which the seller materially participated is excluded. Gain on a C corporation stock sale is investment income regardless of participation. Installment sales spread the exposure across years, which can keep income under the threshold.
What about rental real estate?
Rental income is investment income unless the owner qualifies as a real estate professional and materially participates in the rentals, or the property is rented to a business in which the owner materially participates (the self-rental rule). A Treasury regulation safe harbor treats a real estate professional's rental income and gains as business income outside the surtax if the owner spends more than 500 hours a year on the rentals, or did so in any five of the prior ten years. Short-term rentals that are not "rental activities" under the passive rules escape the surtax if the owner materially participates.
Can anything offset it?
Investment expenses, state taxes allocable to investment income, and investment interest reduce net investment income. Foreign tax credits do not offset the surtax. In Estate of Bruyea v. United States, No. 2025-1563 (Fed. Cir. Aug. 31, 2026), the Federal Circuit held that the Code allows foreign tax credits only against chapter 1 income taxes — the surtax sits in chapter 2A — and that the U.S.–Canada tax treaty does not independently provide a credit against it. The Court of Federal Claims reached the same result under the U.S.–France treaty in Christensen v. United States (2023).
Frequently asked questions
Is the surtax in addition to capital gains tax?
Yes. A top-bracket taxpayer pays 20 percent on long-term gains plus 3.8 percent.
Does it apply to Florida residents?
Yes. It is a federal tax; Florida's lack of income tax does not affect it.
How is it reported?
On Form 8960, attached to Form 1040, and included in estimated tax calculations.
Can a trust owe the surtax?
Yes, at a far lower threshold — adjusted gross income above the start of the top trust bracket, $16,000 for 2026 — which makes distributions to beneficiaries a planning point.
Official sources
The IRS explains: “The Net Investment Income Tax is imposed by section 1411 of the Internal Revenue Code. The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts.” — Internal Revenue Service, Questions and Answers on the Net Investment Income Tax, https://www.irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax
The IRS explains: “Taxpayers use this form to figure the amount of their net investment income tax (NIIT).” — Internal Revenue Service, About Form 8960, Net Investment Income Tax Individuals, Estates, and Trusts, https://www.irs.gov/forms-pubs/about-form-8960
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. Our U.S. Tax Desk tests material participation before year end so active income stays outside the surtax. See pricing or book a free fit call.
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