Medicare Surtax & NIIT Calculator 2026

What Is the NIIT and Who Pays It in 2026?

The Net Investment Income Tax (NIIT) is a 3.8% federal surtax introduced by the Affordable Care Act (ACA) in 2013, codified under IRC Section 1411. It applies to individuals, estates, and trusts whose Modified Adjusted Gross Income (MAGI) exceeds a fixed threshold. In 2026, these thresholds remain: $200,000 for single filers and heads of household, $250,000 for married filing jointly, and $125,000 for married filing separately. Critically, these thresholds are not adjusted for inflation — the same dollar amounts have applied since 2013, meaning an ever-growing share of taxpayers faces this tax each year. The NIIT is calculated on IRS Form 8960 and reported on your Form 1040. Source: IRS Topic 559.

NIIT vs Additional Medicare Tax: Understanding Both Surtaxes

High-income taxpayers often owe two separate surtaxes that are frequently confused. The NIIT (3.8%) applies to investment income — dividends, interest, capital gains, passive rental income, and annuities — when your MAGI exceeds the threshold. The Additional Medicare Tax (0.9%) applies to earned income — wages, salaries, tips, and net self-employment income — above the same MAGI thresholds. It is calculated on IRS Form 8959. These two surtaxes are independent: you can owe NIIT but not the 0.9% surtax (if you have investment income but low wages), or vice versa. Most high-income taxpayers who have both wages and investments owe both. The combined maximum exposure is 3.8% + 0.9% = 4.7% in additional tax on top of regular marginal rates. Note: employers withhold 0.45% Medicare surcharge (half of 0.9%), so you may only owe the remaining 0.45% at filing if your employer did not withhold the full amount. Source: IRS Form 8959 Instructions.

What Counts as Net Investment Income?

Net Investment Income (NII) includes: interest income, ordinary dividends, qualified dividends, short-term and long-term capital gains, rental income from passive activities, royalties, passive business income, and taxable annuity payments. It does not include: wages or self-employment income, Social Security benefits, tax-exempt municipal bond interest, qualified distributions from IRAs or 401(k)s, active business income where you materially participate, or gains on the sale of your primary residence that are excluded under IRC Section 121 (up to $250,000 single / $500,000 MFJ). The distinction between passive and active business income is critical — if you are a non-passive partner or materially participating S-corp shareholder, your pass-through income is excluded from NII. Source: IRS Publication 550.

Legal Strategies to Reduce Your NIIT Exposure

There are several IRS-compliant approaches to minimize NIIT liability: (1) Tax-exempt bonds — municipal bond interest is excluded from NII and does not increase MAGI; (2) Tax-deferred accounts — maximizing Traditional IRA and 401(k) contributions reduces MAGI, potentially keeping you below the threshold; (3) Real estate professional status — spending 750+ hours/year and >50% of working time in real estate converts rental income from passive to active, removing it from NII; (4) Installment sales — spreading capital gain recognition across multiple years can keep annual MAGI below the threshold; (5) Tax-loss harvesting — offsetting capital gains with realized losses reduces NII directly. Note that Roth IRA conversions, while tax-efficient long-term, can spike MAGI in the conversion year and trigger NIIT on investment income that would otherwise be below threshold. Last updated May 2026.