What Is Net Investment Income?

Net investment income (NII) includes interest, dividends, capital gains, rental income, royalties, and income from passive business activities, minus deductible expenses properly allocable to those items. It does not include wages, self-employment income, Social Security benefits, pension payments, or distributions from qualified retirement accounts. High earners face a 3.8% Net Investment Income Tax (NIIT) on the lesser of their NII or the amount by which their modified AGI exceeds $200,000 for single filers or $250,000 for married couples filing jointly — thresholds that are not indexed for inflation. Managing NII can help reduce or avoid the NIIT — for example, by investing in municipal bonds (whose interest is excluded from NII), maximizing retirement plan contributions (which reduces passive income), or ensuring rental income qualifies as non-passive through active participation. The NIIT is calculated on Form 8960 and reported alongside regular income tax.