Net Investment Income Tax for H-1B Visa Holders (Form 8960)

The 3.8% Net Investment Income Tax can hit H-1B filers who have Indian rental income, NRO interest, or significant stock sale gains — even if your W-2 wages are the same as last year.

What Is the Net Investment Income Tax?

The Net Investment Income Tax (NIIT) is a 3.8% surtax enacted by the Affordable Care Act, codified at IRC §1411. It applies to U.S. residents (and certain trusts and estates) whose modified adjusted gross income (MAGI) exceeds the applicable threshold. The tax equals 3.8% of the lesser of:

• Your net investment income, or
• The amount by which your MAGI exceeds the threshold

Form 8960 performs this calculation and the tax flows to Schedule 2, Line 12 of Form 1040.

The Income Thresholds

What Counts as Net Investment Income

Net Investment Income (NII) is defined in IRC §1411(c) and Treasury Regulations §1.1411-4. It includes:

What Does NOT Count as Net Investment Income

This is where many people get confused. The NIIT specifically excludes:

• Wages and salary. Your H-1B W-2 income is not NII, regardless of how high it is. High wages raise MAGI above the threshold, but the NIIT only applies to the NII portion.
• Self-employment income. Schedule C net profit and SE income are not NII. (They may be subject to the separate 0.9% Additional Medicare Tax on Form 8959.)
• IRA and 401(k) distributions. Retirement distributions are excluded from NII even if they increase MAGI. They can push your MAGI above the threshold, exposing other NII to the tax, but the distributions themselves are not NII.
• Active business income. K-1 income from a partnership or S-corp where you materially participate is not passive and is not NII.
• Alimony, Social Security, and unemployment compensation.
• Tax-exempt interest (municipal bond interest) is not NII, though it does count toward MAGI.

H-1B-Specific Situations

Indian Rental Income

If you own property in India and receive rental income, that income is U.S.-taxable (reported on Schedule E) and is also NII because most H-1B filers do not materially participate in an Indian rental property. You should also check whether it needs to be reported on Form 8938 (FATCA) and whether Indian TDS was withheld, which can offset U.S. tax via Form 1116.

NRO Account Interest

Interest earned in NRO accounts is ordinary income and NII. NRE account interest is India-tax-exempt but is fully taxable in the U.S. and counts as NII. Both must be reported on Schedule B and counted in NII on Form 8960.

RSU Sales

When you sell RSU shares after vesting, the gain above your adjusted basis (the fair market value on the vesting date) is a capital gain — and capital gains are NII. In a year with large RSU sales, your NII could spike significantly, especially if RSUs have appreciated since vesting.

PFIC Gains

Gains from Indian mutual funds subject to the Mark-to-Market election (Form 8621) are treated as ordinary income, not capital gains, for regular tax purposes. The NIIT treatment depends on whether those gains are treated as passive — in most cases, they are.

The “Lesser Of” Calculation — A Working Example

Suppose you are single with $210,000 in wages and $15,000 in NII (interest, dividends, and small capital gains).

Now suppose instead your NII were $30,000 (a year with significant stock sales):

The cap at the MAGI excess amount means you cannot owe NIIT on more than the income above the threshold.

Common Mistakes

• Including wages in NII. W-2 wages raise MAGI but are not NII. Only investment and passive income is NII.
• Forgetting Indian rental income is NII. Foreign rental income from passive properties counts. Many H-1B filers omit this from Form 8960 even when they correctly report it on Schedule E.
• Confusing NIIT with Additional Medicare Tax. NIIT (3.8% on investment income, Form 8960) and the Additional Medicare Tax (0.9% on wages/SE income, Form 8959) are different taxes. Both use the same income thresholds but apply to different types of income.
• Not netting investment expenses against NII. Certain investment expenses (investment advisory fees, brokerage fees) can reduce NII. However, the Tax Cuts and Jobs Act eliminated the miscellaneous itemized deduction for these through 2025, so currently very few deductions are available to reduce NII.

How Our Platform Handles This

Our tax engine aggregates NII from all income sources — Schedule B interest and dividends, Schedule D capital gains, Schedule E passive rental income, and K-1 passive income. It automatically populates Form 8960 and applies the "lesser of" calculation based on your MAGI and the correct threshold for your filing status. Indian rental income entered in INR is converted to USD using the IRS yearly average exchange rate before being included in NII.

Read next: Additional Medicare Tax (Form 8959) — the 0.9% surtax on wages that often appears alongside NIIT. Or see our guide on capital gains for H-1B holders to understand how RSU and stock sales flow into the NIIT calculation.