The Net Investment Income Tax (NIIT) is a relatively new tax introduced in 2013 as part of the Affordable Care Act. It applies an additional 3.8% tax on certain types of investment income once your Modified Adjusted Gross Income (MAGI) exceeds specific income thresholds. The tax officially went into effect on January 1, 2013, as part of the Health Care and Education Reconciliation Act of 2010. If you’re a U.S. expat, understanding how NIIT works—and how it could impact your global income—is critical to managing your total tax exposure.
Let’s break it down in plain English.
What is Net Investment Income Tax?
NIIT, also known as the 3.8% Medicare surtax, is a tax on the lesser of:
- Your net investment income (NII), or
- The amount your MAGI exceeds the NIIT threshold for your filing status
This applies to individuals, estates and trusts with high income levels exceeding the applicable threshold amounts. Only U.S. citizens and resident aliens with net investment income exceeding the MAGI thresholds are required to pay the NIIT. And yes—U.S. expats are fully subject to it, no matter where you live or where your investment income comes from.
Who Owes NIIT? Income Thresholds by Filing Status
If your MAGI is over the amounts below, you may owe NIIT:
- $250,000 for married filing jointly or qualifying widow(er)
- $200,000 for single or head of household
- $125,000 for married filing separately
These thresholds are not indexed for inflation and have remained the same for years. Even a moderate increase in investment income can push taxpayers into NIIT territory.
What Counts as Net Investment Income?
Net investment income includes things like interest, dividends, capital gains, rental income, royalties, business income from passive activities, and trading financial instruments or commodities. If you’re earning from stocks, mutual funds, bonds, or foreign rental properties, it’s likely subject to the Net Investment Income Tax. These are taxable under NIIT when your modified adjusted gross income (MAGI) goes over the income threshold for your filing status—like married filing jointly, married filing separately, or single.
To figure out your net investment income, subtract investment expenses from your total. That includes brokerage fees, investment advisory fees, trading fees, fiduciary costs (for estates and trusts), investment interest expenses, and other certain investment expenses like state or local taxes tied to your investment income. This helps offset your net gains and lowers the taxable portion.
What’s Not Included?
NIIT doesn’t apply to wages, salaries, unemployment compensation, Social Security benefits, alimony, tax-exempt interest (like from municipal bonds), or distributions from retirement plans like 401(k)s and IRAs. These are not considered part of net investment income and don’t affect your NIIT directly. Additionally, self employment income, such as that paid from an S-corporation, is also not subject to NIIT.
Why It Hits Expats Hard
As a U.S. expat, even foreign-sourced capital gains, rental income, and foreign mutual funds count. You may be using the Foreign Earned Income Exclusion (FEIE) or Foreign Tax Credit (FTC) to reduce regular income tax, but they don’t reduce MAGI for NIIT. So, even if your foreign salary is excluded, your investments can still push you over the statutory threshold, triggering this extra tax. Additionally, the impact of capital gains tax on foreign-sourced capital gains can further complicate your tax situation, potentially increasing your overall tax liability.
Who Pays NIIT?
The NIIT applies to individuals, estates, and trusts with income above certain thresholds. For individuals, it’s based on filing status—$200,000 for single filers, $250,000 for married filing jointly, and $125,000 for married filing separately. Estates and trusts owe NIIT if they have undistributed net investment income and income above the top tax bracket threshold—$15,650 in 2025. The net investment income tax (NIIT) is a 3.8% tax the IRS levies on higher-income individuals, trusts, and estates that earn net investment income. Some trusts, like charitable remainder and lead trusts, are exempt. While individuals are the primary focus, high-income estates and trusts shouldn’t overlook this tax.
How is NIIT calculated?
Calculate your adjusted gross income, add back excluded foreign income and deductions like student loan interest or pre-tax accounts, and compare it to your NIIT threshold. If your MAGI exceeds the threshold, you pay 3.8% on the smaller of your net investment income or the amount your MAGI goes over the limit. Use Form 8960, attach it to your Form 1040, and consider making quarterly estimated payments to avoid a surprise tax bill. Additionally, adjusting your income tax withholding can help manage your tax liability and prevent underpayment penalties during the tax year. Strategies like tax-loss harvesting, contributing to tax-advantaged accounts, and deducting eligible investment expenses can also help minimize your NIIT liability.
Should You Worry About NIIT?
If you’re a U.S. expat with investment income, the Net Investment Income Tax is something you can’t ignore—especially since it applies regardless of where you live or where your investments are located. Understanding the NIIT thresholds, exclusions, and interaction with your global income is key to avoiding a surprise tax bill.
Need Help with Your NIIT or Expat Tax Filing?
At 1040 Abroad, our expert expat tax professionals can review your situation and help you stay compliant while minimizing your total tax burden. Whether you’re worried about NIIT, filing status thresholds, or foreign tax credit planning, we’re here to help.
Book a free consultation with us today and get clarity on your financial future.
