NIIT: the 3.8% surtax with the frozen threshold
The net investment income tax (NIIT) is a 3.8% federal surtax on investment income above an income threshold — $250,000 of MAGI for joint filers, $200,000 for single filers and heads of household, $125,000 for married filing separately. Those numbers are the same for 2026 as they were in 2013, when the tax took effect, because Congress wrote them into the statute with no inflation adjustment. Every year, ordinary inflation quietly moves more households over a line that never moves.
How the tax is computed
NIIT is 3.8% of the smaller of two numbers: your net investment income, or the amount by which your MAGI exceeds the threshold. Net investment income includes interest, dividends, capital gains, rental and royalty income, and income from non-qualified annuities, minus related investment expenses. A couple with $220,000 of ordinary income and $60,000 of capital gains has MAGI of $280,000: the excess over $250,000 is $30,000, which is smaller than the $60,000 of investment income, so the tax is 3.8% of $30,000 — $1,140, reported on Form 8960.
What counts, what doesn’t — and the two-list trick
The subtlety is that NIIT runs on two separate lists. Wages, self-employment income, Social Security, pension payments, IRA and 401(k) withdrawals, and Roth conversions are not net investment income — the 3.8% is never charged on them directly. But every one of them (except qualified Roth withdrawals) raises MAGI, and MAGI is what determines how much of your investment income falls above the threshold. A $100,000 Roth conversion in a year when you also have $40,000 of dividends and gains can drag that whole $40,000 into the surtax even though the conversion itself is NIIT-free. Municipal bond interest is the rare double-exempt item: not investment income for NIIT, and not in MAGI either.
The frozen threshold is the story
Nearly every other number in the tax code — brackets, the standard deduction, capital-gains breakpoints — is indexed to inflation. The NIIT thresholds are not. Had they tracked inflation since 2013, the joint threshold would sit well above $300,000 today; instead it is still $250,000, so the surtax reaches steadily further into the upper middle class each year. For planners this freeze has a concrete consequence inside long simulations: in nominal-dollar terms, a portfolio that merely keeps pace with inflation generates ever-larger dividends and realized gains against a fixed line, so late-plan years are much more likely to owe NIIT than early ones — even with no real growth at all.
Planning around a fixed line
Because the trigger is MAGI, the levers are familiar: harvesting losses to shrink net investment income, timing big capital gains and Roth conversions into different calendar years so neither pushes the other over the line, using qualified charitable distributions (which bypass MAGI entirely) instead of cash gifts after 70½, and preferring Roth withdrawals in years already near the threshold. On the margin the stakes are real but modest: crossing the line turns a 15% long-term-gains rate into 18.8%, and the top 20% rate into 23.8%. It is a smooth phase-in — unlike ACA or IRMAA cliffs, one extra dollar costs at most 3.8 cents, so NIIT is a reason to shade decisions, not to panic.
The collision most retirees actually hit is at RMD age. Required minimum distributions are not investment income, but they are forced MAGI — and they arrive in the same late-plan years when a taxable account has decades of accumulated dividends and gains. A household that never owed NIIT at 65 can owe it every year at 78 simply because RMDs push MAGI over a threshold that inflation has been shrinking in real terms the whole time. That makes pre-RMD Roth conversions a double-edged NIIT tool: they can trigger the surtax in the conversion years, and quietly eliminate it in all the years after.
Try it in Deorbit Plan
The engine computes NIIT every simulated year using the statutory, deliberately unindexed thresholds for your filing status — which is exactly how the freeze bites over a 30-year plan. The Tax & MAGI chart stacks NIIT into the federal tax bars alongside the MAGI line, and the Year table’s expandable detail rows show the NIIT dollars year by year. Try adding a large Roth conversion in the Strategy panel and watch NIIT appear in years where your dividends were previously below the line.
Educational content only — not financial, tax, or investment advice.
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