Topic · Investment tax
Do Americans abroad pay the net investment income tax?
Yes, on the same terms as anyone else: 3.8% of the smaller of net investment income and MAGI over a fixed threshold — with the foreign earned income exclusion added back, and with no foreign tax credit against it.
By Danilson Ramos · Founder, Atamatax
Published June 2026 · Updated September 2026
Check it for your own income
Does the 3.8% reach your investment income?
Four banded answers, no figures typed, no email. The read says which side of the threshold you sit on and — if you paid tax abroad — what that credit can and cannot do.
Free, no account, nothing you answer leaves this page. Open the full NIIT Exposure Check
A banded screen for a US citizen or resident; Form 8960 settles the exact figure. Four answers give bands for net investment income and MAGI, and no read here nets a foreign tax credit against the 3.8% — the Code allows none.
The net investment income tax was added to the Code in 2010 as chapter 2A — a chapter of its own, beside the ordinary income tax in chapter 1. That placement, which looked like a drafting detail for a decade, is now the whole story for Americans abroad: the foreign tax credit lives in chapter 1 and reaches only chapter 1 tax, and the courts have finished saying so. The tax is small in rate and large in surprise, because most people who owe it abroad did not think they had US tax to pay at all.
Who pays it
US citizens and residents whose modified adjusted gross income exceeds a threshold that depends only on filing status. The thresholds have not moved since the tax took effect for 2013:
| Filing status | MAGI threshold |
|---|---|
| Single · Head of household | $200,000 |
| Married filing jointly · Qualifying surviving spouse | $250,000 |
| Married filing separately | $125,000 |
The tax is 3.8% of the smaller of two numbers: your net investment income for the year, and the amount your MAGI exceeds the threshold. Both have to be positive. Someone with $250,000 of salary and $40,000 of dividends filing jointly owes nothing on the dividends — their MAGI is not over the line by a dollar. Someone with $290,000 of salary and the same $40,000 owes 3.8% of $40,000, because the excess ($80,000) is larger than the investment income.
What is net investment income
Section 1411(c) lists three groups. First, gross income from interest, dividends, annuities, royalties and rents. Second, other gross income from a passive activity or from a trade or business of trading financial instruments or commodities. Third, net gain from the disposition of property — shares, fund units, real estate, digital assets — other than property held in an active business. From those you subtract the deductions properly allocable to them, and the result is net investment income.
Nothing in the definition asks where the income came from. A dividend from a French SICAV, interest on a Livret A, a gain on a Canadian rental property or on a TSX-listed ETF is net investment income exactly as its US equivalent would be. The source of the income matters for the foreign tax credit against your regular tax; it does not matter here.
| Income | Net investment income? | Note |
|---|---|---|
| Salary, bonus, self-employment profit | No | Earned income; the Additional Medicare Tax is its counterpart |
| Dividends and interest (any country) | Yes | Including a locally tax-exempt account |
| Gain on shares, funds, ETFs sold | Yes | Net of losses, to the §1211(b) limit |
| Rent from a property abroad | Yes | Unless a non-passive real-estate business as to you |
| Gain on a property sold abroad | Yes | Only the part not excluded under §121 for a home |
| Distribution from a US 401(k) or IRA | No | §1411(c)(5) excludes the listed US plans |
| Distribution from a foreign pension | Review | The exclusion names US plans only; the character is settled per plan |
| QEF inclusion from a PFIC | Depends | Counted only with the §1.1411-10(g) election; the later distribution counts otherwise |
| Mark-to-market inclusion, §1291 gain | Yes | Reg. §1.1411-10(c)(2) |
Why the foreign tax credit does not help
Sections 27 and 901(a) allow foreign taxes as a credit against "the tax imposed by this chapter" — chapter 1. The NIIT is imposed by chapter 2A. So the Code gives no credit, whatever country the tax was paid to. For years taxpayers in France and Canada argued that their treaties supplied one independently; two trial courts agreed; and on August 31, 2026 the Federal Circuit reversed both, in precedential opinions, holding that the treaty credits are themselves subject to the Code's limitation. The full account is on the credit-boundary page.
What the credit does do is unchanged. French or Canadian income tax on your dividends and gains still reduces your regular US income tax on Form 1116, within the §904 limit, with the treaty's re-sourcing rules where they apply. In many cases that credit wipes the regular tax out entirely — which is exactly why the 3.8% is the number that survives, and the one that arrives as a surprise.
What to do about it
- Work out MAGI with the foreign earned income exclusion added back, and compare it with the threshold for your filing status.
- List your investment income by kind — dividends, interest, gains, rents, fund distributions — from every account, including the locally tax-favoured ones.
- Separate what is net investment income from what is not: wages and foreign-pension payments come out, everything else stays in until a person says otherwise.
- Set net investment income beside the excess MAGI; the smaller number is the base, and the tax is 3.8% of it.
- Take the foreign tax credit on Form 1116 against the regular tax, and take nothing against Form 8960 — a line 9b deduction of the foreign tax, when itemised, is the only route by which it can lower the base.
- If the income is from non-US funds, do the PFIC work first: the §1291, mark-to-market and QEF regimes decide what the chapter 1 income is, and §1411 follows.
Where do you stand against the threshold?
Four banded answers — filing status, income band, investment income, foreign tax paid — and a read on the 3.8%, with Form 8960, Form 1116, PFIC, FBAR and Form 8938 laid out beside it.
Authorities cited
- IRC §1411 — IRC §1411 — Net Investment Income Tax (3.8%)
- IRS Form 8960 — About Form 8960 — Net Investment Income Tax (Individuals, Estates, and Trusts)
- Instructions for Form 8960 — Instructions for Form 8960 (2025) — thresholds by filing status, MAGI, lines 1–17, CFC/PFIC adjustments
- 26 CFR §1.1411-2 — 26 CFR §1.1411-2 — Application to individuals; modified adjusted gross income (the §911 add-back)
- 26 CFR §1.1411-4 — 26 CFR §1.1411-4 — Definition of net investment income; properly allocable deductions
- 26 CFR §1.1411-10 — 26 CFR §1.1411-10 — Controlled foreign corporations and passive foreign investment companies (QEF, mark-to-market and §1291 amounts in net investment income; the §1.1411-10(g) election)
- IRC §27 — IRC §27 — Taxes of foreign countries and possessions: credit allowed against the tax imposed by chapter 1 to the extent provided in §901
- IRC §901 — IRC §901 — Taxes of foreign countries and U.S. possessions
- IRC §911 — IRC §911 — Foreign earned income exclusion + housing exclusion/deduction
- Christensen v. United States (Fed. Cir. 2026) — Christensen v. United States, No. 24-1284 (Fed. Cir. Aug. 31, 2026) (precedential) — the U.S.–France treaty's Article 24(2)(a) and 24(2)(b) credits are subject to the Code's §§27/901(a) limitation and do not offset the §1411 net investment income tax; reversing 168 Fed. Cl. 263 (2023)
- Estate of Bruyea v. United States (Fed. Cir. 2026) — Estate of Paul Bruyea v. United States, No. 25-1563 (Fed. Cir. Aug. 31, 2026) (precedential) — the U.S.–Canada treaty's Article XXIV(1) and XXIV(4)(b) credits are subject to the U.S. Law Limitation; the Code and Convention unambiguously preclude offsetting the NIIT by a foreign tax credit; reversing 174 Fed. Cl. 238 (2024)
Primary sources (Cornell Legal Information Institute for the US Code and CFR; IRS.gov for forms, procedures, and treaty documents). This page is general information, not individualized tax or legal advice.
Atamatax provides tax preparation support and educational resources. This website does not constitute legal or tax advice.