The 3.8% net investment income tax on dividends

What is the net investment income tax?

The net investment income tax (NIIT) is a 3.8% federal tax that applies to US taxpayers with higher incomes. It is separate from, and added to, regular income tax. Dividends, whether qualified or not, are included in net investment income. The IRS NIIT page lists the other kinds of investment income that are included.

For a dividend investor, that means the top-line rate on qualified dividends can be 15% plus 3.8%, or 20% plus 3.8%, once income is high enough. See US qualified dividends for the regular rates.

The NIIT is worked out separately from regular income tax and then added to it. That makes it easy to overlook if you look only at the qualified dividend rate table.

The thresholds

The IRS states that these threshold amounts are not indexed for inflation. Unlike the qualified dividend breakpoints, which are adjusted for inflation, they stay the same unless the law changes, so more income can fall above them over time.

Compare that with the 2026 qualified dividend breakpoints, which run to $545,500 of taxable income for single filers before the 20% rate starts. The two tests use different income measures, but a single filer above the NIIT line and below that breakpoint can face 15% plus 3.8% on qualified dividends caught by the NIIT.

How is it calculated? The lesser-of rule

The lesser-of rule means NIIT never applies to more than your investment income, and never to more than the amount you are over the line.

For example, a hypothetical filer with $5,000 of dividends and MAGI $50,000 over the threshold pays NIIT on $5,000, the smaller number: 3.8% × $5,000 = $190.

1. Find your net investment income. Dividends count. The IRS NIIT page lists the other types of income included and the expenses that can reduce it.
2. Find how far MAGI exceeds the threshold. Subtract your filing status threshold from your modified adjusted gross income. If the result is zero or less, there is no NIIT.
3. Take the smaller of the two numbers.
4. Multiply by 3.8%.

Worked example: $20,000 of qualified dividends

A hypothetical taxpayer has $190,000 of MAGI before dividends and $160,000 of other taxable income in 2026, then receives $20,000 of qualified dividends. Here are two filing statuses, from our tax engine.

Where does the NIIT start and stop growing?

The lesser-of rule creates a ramp. Below the threshold there is no NIIT. As MAGI rises above it, more of the dividends are caught, until every dollar of investment income is covered. After that, extra income from other sources doesn’t increase the NIIT on the same dividends. Here is a hypothetical single filer with $20,000 of qualified dividends at three income levels, from our tax engine.

What to keep in mind

• It stacks with the qualified dividend rate. NIIT is added to regular tax, so the 0%, 15% or 20% rate is only part of the picture at higher incomes.
• Reinvested dividends count. Dividends used to buy more shares are still taxable dividends. See DRIPs and cost basis.
• The line stays put. Because the thresholds aren’t indexed, an income level that is below the line today can cross it in later years as income grows, even if the rules themselves don’t change.
• MAGI isn’t the same as taxable income. The qualified dividend breakpoints use taxable income; NIIT uses modified adjusted gross income, so the two tests can give different answers for the same person.
• It is a US tax on US taxpayers. Canadian residents who aren’t US taxpayers generally face US withholding on US dividends instead. See the Canada–US treaty page.