Key takeaways
- The tax is 3.8% of the lesser of net investment income or the amount by which modified AGI exceeds $200,000 (single) or $250,000 (joint).
- Interest, dividends, capital gains, rents, royalties, and passive business income count; wages, retirement account withdrawals, and Social Security do not, but they raise AGI toward the threshold.
- Because the thresholds are not indexed, more households cross them every year.
- Reducing AGI (retirement contributions, HSA, QCDs, timing gains) and choosing tax-exempt or deferred investments are the main levers.
The net investment income tax was enacted in 2010 as part of the Affordable Care Act and took effect in 2013, with thresholds of $200,000 for single filers and $250,000 for joint filers. It was sold as a tax on high earners. Thirteen years of inflation later, with the thresholds untouched, it reaches a large share of two-income professional households and a great many retirees with taxable portfolios. If you're above the line, it turns a 15% capital gains rate into 18.8% and a 20% rate into 23.8%. It's one of the reasons a tax projection needs an AGI line and not just a bracket line.
How it's calculated
The tax is 3.8% of the smaller of two numbers: your net investment income for the year, or the amount by which your modified adjusted gross income exceeds the threshold ($200,000 single, $250,000 married filing jointly, $125,000 married filing separately). Modified AGI for this purpose is plain old AGI for almost everyone.
Say a joint filer has $230,000 of wages and $40,000 of dividends and gains. AGI is $270,000, which is $20,000 over the threshold. The tax is 3.8% of the lesser of $40,000 (investment income) or $20,000 (the excess), so $760. A joint filer with $300,000 of wages and the same $40,000 of investment income pays 3.8% of the full $40,000, or $1,520.
Two things follow from that structure. Wages and other non-investment income don't get taxed themselves, but they push AGI over the threshold and expose your investment income. And the tax only ever reaches investment income, so the question is always how much of it sits above the line.
What counts as investment income
- Taxable interest
- Dividends, qualified and non-qualified
- Capital gains, short-term and long-term, including gains from selling a home above the exclusion
- Rental income and royalties
- Income from passive business activities and from trading in financial instruments
- Annuity payments (the taxable portion)
Less the deductions allocable to that income: investment interest expense, state taxes allocable to investment income, and rental expenses.
What doesn't count
- Wages and self-employment income
- Distributions from IRAs, 401(k)s, 403(b)s, and other qualified plans
- Social Security benefits
- Tax-exempt municipal bond interest
- Income from a business in which you materially participate
- Gains excluded from income, such as the primary residence exclusion and qualified small business stock
- Life insurance death benefits
Retirement account withdrawals are the one to watch. They aren't investment income, but they raise AGI. So a large IRA withdrawal or Roth conversion can push a retiree over $250,000 and expose their dividends and gains to the tax, even though the withdrawal itself isn't touched by it.
Planning around it
Reduce AGI. Anything that lowers AGI lowers the excess over the threshold. Maximum 401(k) deferrals ($24,500 in 2026 plus catch-ups), HSA contributions ($4,400 or $8,750), deductible IRA contributions where available, and qualified charitable distributions after 70½ all work. So does timing. Recognize a large gain in a year when AGI is otherwise under the threshold.
Locate investments well. Interest-producing assets in tax-deferred accounts generate no current investment income; see asset location. Municipal bonds in taxable accounts throw off interest that's exempt from both regular tax and the surtax.
Spread gains across years. Because the tax hits the lesser of investment income or the excess, spreading a large gain over two or three years can keep each year's excess small. This is part of the schedule for unwinding a concentrated position.
Harvest losses. Realized losses reduce net investment income directly, dollar for dollar against gains. A bank of harvested losses is worth extra to anyone above the threshold.
Pick the right year for Roth conversions. A conversion raises AGI without being investment income. For a retiree with a taxable portfolio, converting in a year with low investment income, or before the taxable portfolio grows, limits the exposure. That interaction belongs in the Roth conversion projection.
Material participation. Rental real estate income is generally investment income unless you qualify as a real estate professional and materially participate. Business owners who materially participate in their business are outside the tax on that income. Passive investors in the same business are inside it.
Where it overlaps with other thresholds
The $250,000 joint threshold sits near the 2026 IRMAA first tier at $218,000, the 24% bracket, and the phase-out of the new senior deduction ($150,000 to $250,000 joint). A retired couple managing income somewhere between $220,000 and $260,000 is managing four different cliffs at once. The projection has to show all of them, or it isn't much of a projection.
Where we come in
The surtax gets its own line in every client's tax projection, so the year's decisions about gains, conversions, and withdrawals are made with the excess over the threshold sitting right there on the page. For clients consistently above it, asset location and municipal bonds in the taxable account are structural. For those near it, timing does most of the work. It's a straightforward piece of tax planning once it's on the page, and a reliable surprise when it isn't.
Frequently asked questions
Is the 3.8% tax indexed for inflation?
No. The thresholds have been $200,000 and $250,000 since 2013 and would take legislation to change. Each year more taxpayers cross them.
Does the tax apply to the sale of my home?
Only to gain above the $250,000 single / $500,000 joint exclusion, and only if AGI exceeds the threshold in the year of sale. A big gain on a long-held Florida home can trigger it.
Do I pay the tax on my IRA withdrawals?
No. Retirement account distributions aren't net investment income. They raise AGI, which can expose your other investment income to the tax.
Are trusts subject to it?
Yes, and at a far lower threshold. A non-grantor trust pays the tax on undistributed investment income above roughly $16,000 in 2026. Trustees of trusts holding investments should distribute or plan accordingly.
Joseph G. Valerio, CFP®, EAFounder and Lead Advisor at Valerio Wealth Management, a fee-only, fiduciary virtual family office in Miami, Florida. One advisor, credentialed in both financial planning and federal tax. About Joseph
This article is general education, not individualized advice, and it is not tax, legal, or accounting advice. Figures reflect federal law for the year stated and can change. Valerio Wealth Management does not prepare or file tax returns. Speak with a qualified professional about your own situation before acting.
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