What Is the MRT Tax and Who Has to Pay It?
Understand the mechanics of the Net Investment Income Tax, a 3.8% tax on investment earnings for filers who are above specific income thresholds.
The Net Investment Income Tax (NIIT) is a tax applied to certain individuals, estates, and trusts that have income from investments. Established as part of the Health Care and Education Reconciliation Act of 2010, this tax is calculated separately from and is in addition to the regular income tax system. The NIIT rate is 3.8% and is targeted at higher-income individuals, affecting only those whose income exceeds specific statutory thresholds for their filing status.
Determining Applicability of the Tax
The Net Investment Income Tax applies to U.S. citizens and resident aliens, as well as many estates and trusts. Nonresident aliens are generally not subject to the NIIT. For individuals, the primary factor in determining if the tax applies is their Modified Adjusted Gross Income (MAGI). For NIIT purposes, MAGI is the Adjusted Gross Income (AGI) from a taxpayer’s Form 1040, increased by any foreign-earned income exclusion.
The specific MAGI thresholds that trigger potential liability depend on the taxpayer’s filing status. These thresholds are not indexed for inflation.
- $250,000 for married couples filing a joint return or for a qualifying surviving spouse.
- $200,000 for individuals who are single or file as head of household.
- $125,000 for those who are married but file separate tax returns.
Estates and trusts are subject to the tax if their AGI exceeds the threshold for the highest income tax bracket for the given year, which is $15,650 for 2025.
Defining Net Investment Income
Net Investment Income (NII) encompasses several categories of income earned from property held for investment. The calculation begins with gross investment income, which includes interest, dividends, and annuities. Capital gains from the sale of property, such as stocks, bonds, and investment real estate, are a component of NII. This includes both short-term and long-term capital gains.
Income from rental and royalty activities is also generally included in the definition of NII, as is income from a business in which the taxpayer does not materially participate. To arrive at net investment income, properly allocable investment expenses, such as investment interest expense, advisory fees, and state and local income taxes, are deducted from the gross investment income.
Certain types of income are explicitly excluded from the NII calculation. Wages, unemployment compensation, and income from a business in which the taxpayer actively participates are not considered investment income. Other exclusions include Social Security benefits, alimony, and tax-exempt interest from municipal bonds. Distributions from qualified retirement plans, like 401(k)s and IRAs, are also not included in NII.
Calculating the Tax Liability
The tax is 3.8% of the lesser of two amounts: the taxpayer’s total net investment income for the year or the amount by which the taxpayer’s Modified Adjusted Gross Income exceeds the applicable income threshold for their filing status. This “lesser of” rule is a central feature of the calculation.
To illustrate, consider a single individual with a MAGI of $250,000 and net investment income of $40,000. The MAGI threshold for a single filer is $200,000. First, the excess MAGI over the threshold is calculated: $250,000 minus $200,000 equals $50,000. The tax is then based on the lesser of the NII ($40,000) or the excess MAGI ($50,000). In this case, the tax would be 3.8% of $40,000, resulting in an NIIT liability of $1,520.
In a different scenario, if the same single individual had a MAGI of $220,000 and NII of $40,000, the calculation would change. The excess MAGI over the $200,000 threshold would be $20,000. Since this $20,000 excess is less than the $40,000 of NII, the tax would be applied to the smaller amount. The NIIT liability would be 3.8% of $20,000, which equals $760.
Reporting and Paying the Tax
Taxpayers who are liable for the Net Investment Income Tax must calculate and report it on IRS Form 8960, Net Investment Income Tax—Individuals, Estates, and Trusts. This form is not filed independently; it must be attached to the taxpayer’s annual income tax return, such as Form 1040 for individuals or Form 1041 for estates and trusts. The resulting tax liability from Form 8960 is then carried over to the main tax return.
Payment of the NIIT is handled in the same manner as regular income tax. To avoid potential underpayment penalties, taxpayers should account for their NIIT liability throughout the year. This can be accomplished by increasing the amount of income tax withheld from their wages or by making quarterly estimated tax payments. These payments are often used to cover both regular income tax and any anticipated NIIT.