The 3.8% Tax Only High Earners Pay and Why More People Are Getting Hit Every Year

Most federal tax thresholds rise each year with inflation. The 3.8% net investment income tax (NIIT) stays where it started. For tax year 2026, the IRS moved the start of the 32% bracket to $201,775 for single filers ($403,550 for married couples filing jointly). The NIIT threshold remains at the figure Congress wrote into the Internal Revenue Code. That gap is why more households that never thought of themselves as wealthy now find Form 8960 in their returns.

What Section 1411 Actually Taxes

Under 26 U.S.C. § 1411(a)(1), an individual owes a 3.8% tax on the lesser of net investment income or the amount by which modified adjusted gross income (MAGI) exceeds a threshold amount. Section 1411(b) sets that threshold at $250,000 for joint returns and surviving spouses (§ 1411(b)(1)), half of that amount for married people filing separately (§ 1411(b)(2)), and $200,000 in every other case (§ 1411(b)(3)). IRS Publication 550 for tax year 2025 lists the same figures, including $125,000 for married filing separately. Subsection (b) has no cost-of-living adjustment clause, so those amounts carry into 2026 returns unless Congress changes the statute. The tax has applied since January 1, 2013.

Net investment income, defined in § 1411(c)(1)(A), covers interest, dividends, annuities, royalties and rents earned outside an active business, income from passive activities and trading businesses, and net gain from selling property, minus allocable deductions. Treasury applies the gain rule generally: 26 CFR 1.1411-4(d)(1) treats a sale, exchange, transfer, conversion, cash settlement, cancellation or expiration as a disposition. Estates and trusts face a separate version under § 1411(a)(2), which starts where the top trust income tax bracket begins.

Why the Net Catches More Households Every Year

Fixed thresholds meet rising incomes. Personal income receipts on assets (interest, dividends and similar income) grew from $3,382.1 billion in the first quarter of 2022 to $4,719.2 billion in the third quarter of 2026, a 39.5% increase. Per-capita disposable income rose from $55,129 to $70,631 over the same stretch.

Portfolios are growing even faster at the top. Federal Reserve distribution data show the top 1% by income held 39.6% of household stock and mutual fund holdings in the second quarter of 2026, and the value of those holdings rose 30.9% from a year earlier. The 80th to 99th percentile held 47.6%, up 26.2%. Bigger unrealized gains mean bigger realized gains when people sell.

Who Gets Hit Without Seeing It Coming

• Long-time homeowners. Section 121(a) excludes home-sale gain if you owned and lived in the house as your principal residence for two of the past five years, limited at $250,000 under § 121(b)(1) or $500,000 for qualifying joint filers under § 121(b)(2)(A). Those caps are fixed too. Gain above them is net investment income, because § 1411(c)(1)(A)(iii) reaches gain taken into account in computing taxable income. The Case-Shiller national index stood at 336.741 in August 2026, up 2.1% year over year.
• Retirees selling appreciated stock. Section 1411(c)(5) keeps distributions from 401(a), 403(a), 403(b), 408, 408A and 457(b) plans out of net investment income. The IRS notes those distributions are taken into account when determining the modified AGI threshold, though. A large IRA withdrawal plus a brokerage-account sale can push a retiree over the line in a single year.
• Landlords and passive owners. Rental income and K-1 income from businesses you don’t actively work in count as investment income.

Worked Example for Tax Year 2026

A hypothetical married couple filing jointly earns $180,000 in wages. They sell the home they’ve lived in for decades at a $650,000 gain and exclude $500,000, which leaves a $150,000 taxable gain. They also receive $20,000 in dividends.

• MAGI: $350,000
• Net investment income: $170,000
• MAGI above the $250,000 threshold: $100,000
• NIIT on the smaller amount: $3,800

This tax comes on top of regular capital gains tax. The wages aren’t net investment income themselves, but they raise MAGI, and that determines how much of the investment income gets taxed.

Traps That Turn One Good Year Into a Surtax Year

Medicare stacking. MAGI also sets Medicare surcharges. In 2026, joint filers above $750,000 pay a Part B adjustment of $487 a month, and the first tier starts above $218,000. A single large sale can trigger both the NIIT and these surcharges.

Filing separately. Couples who file separately each get only half of the joint threshold, so the tax starts much sooner for each spouse.

Activity classification. The same rental or business income can fall in or out of the tax depending on whether it counts as a passive activity under § 469. Weak documentation of your participation is a common audit issue.

How to Decide Whether Timing a Gain Is Worth It

Three questions determines whether planning around the NIIT pays off. First, will your MAGI land close to the threshold, or will one transaction push it far past? Second, can the gain be spread across tax years, for example through an installment sale (covered in IRS Publication 537)? Third, is the income passive, or can you show material participation?

Timing helps households with steady income below the threshold and a one-time gain. It does little for households far above the line every year, whose investment income is fully exposed either way. Households that never come near the threshold have nothing to manage. The NIIT is one of several quiet IRS rules that drain retirement accounts without warning, and we mapped out the full set in a free tax trap guide. Watch for the 2026 Form 8960 instructions and any amendment to § 1411(b). Until Congress acts, the line remains fixed while incomes and asset values keep rising.

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