Blog · 15 October 2026

Net Investment Income Tax and Form 8960: Thresholds, MAGI Traps and the Bruyea–Christensen FTC Ruling for US CPA Firms

By Keshav Bansal, CA

Year-end asset sales can push clients into the net investment income tax even when capital-gains rates look familiar. Under IRC §1411, the 3.8% NIIT applies to the lesser of net investment income or the amount by which modified adjusted gross income exceeds fixed statutory thresholds—and those thresholds are not indexed for inflation. On August 31, 2026, the Federal Circuit reversed taxpayer wins in Estate of Bruyea and Christensen: treaty foreign tax credits cannot offset the NIIT. For US CPA firms, Form 8960 and Schedule 2 deserve a pre-filing checklist beside any cross-border credit workpapers.

How the 3.8% NIIT works

Per the IRS Net Investment Income Tax page (updated July 1, 2026) and the IRS NIIT questions and answers (updated September 14, 2026), individuals owe NIIT when they have net investment income and MAGI above the applicable threshold. The tax is 3.8% of the lesser of (1) net investment income or (2) MAGI over the threshold. The statutory thresholds, which the IRS states are not indexed for inflation, are:

• Married filing jointly / qualifying widow(er): $250,000
• Single / head of household: $200,000
• Married filing separately: $125,000

The tax took effect for tax years beginning on or after January 1, 2013. It is separate from the 0.9% Additional Medicare Tax: the IRS notes you may owe both, but not on the same type of income. NIIT is computed on Form 8960; per the Instructions for Form 8960 (2025), individuals include line 17 on Schedule 2 (Form 1040), line 12. Estates and trusts use the same form when they have undistributed NII and AGI over the highest §1(e) bracket for the year.

What counts as net investment income—and what does not

IRS guidance generally treats as NII: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from a trade or business of trading in financial instruments or commodities, and other income from a §469 passive activity. Properly allocable investment expenses reduce gross investment income to arrive at NII.

Common items that are not NII, per the IRS Q&A and Form 8960 instructions, include wages, unemployment compensation, Social Security benefits, alimony, tax-exempt interest, most self-employment income subject to tax under §1401(b), Alaska Permanent Fund Dividends, and distributions from certain qualified plans described in §§401(a), 403(a), 403(b), 408, 408A, or 457(b)—the familiar IRA, Roth IRA, 401(k), 403(b), and governmental 457(b) buckets. Gain excluded under §121 on a principal residence is likewise outside NII to the extent it is excluded for regular tax. Passive rental and investment gains still matter for year-end harvest planning; see our qualified dividends and SIH Partners guide.

IRA and 401(k) distributions: not NII, but they raise MAGI

Qualified-plan and IRA distributions are excluded from NII under §1411(c)(5) as the IRS frames that list. They still enter adjusted gross income when taxable, and MAGI for NIIT starts from AGI (with limited §911 and CFC/PFIC adjustments per the IRS Q&A). A large Roth conversion or traditional IRA withdrawal therefore does not itself generate NIIT on the distribution, but it can push MAGI over the threshold and expose other interest, dividends, capital gains, or passive income to the 3.8% tax. Model that MAGI lift before year-end conversions and portfolio sales. Social Security is also off the NII list; provisional-income stacking under §86 is separate—see our Social Security benefits tax under §86.

Federal Circuit: Bruyea and Christensen bar treaty FTCs against NIIT

On August 31, 2026, the U.S. Court of Appeals for the Federal Circuit (Judges Chen, Hughes, and Stark; opinion by Judge Stark) reversed the Court of Federal Claims in Estate of Paul Bruyea v. United States, No. 2025-1563, and the companion Christensen v. United States, No. 2024-1284. KPMG TaxNewsFlash (August 31, 2026) and Manasa Nadig, EA (October 8, 2026) summarize the same holdings.

In Bruyea, a U.S. citizen residing in Canada sold Canadian real estate in 2015, paid Canadian tax on the gain, and owed $263,523 of U.S. NIIT on the same income. He claimed a foreign tax credit against the NIIT under Article XXIV of the U.S.–Canada income tax Convention. The IRS disallowed the credit; the Court of Federal Claims granted summary judgment for the taxpayer; the Federal Circuit reversed. Christensen presented the parallel U.S.–France Article 24 question and was likewise reversed.

The court’s core reasoning matches the IRS NIIT Q&A on credits: §§26(b), 27, and 901 allow foreign tax credits only against taxes imposed by Chapter 1 of the Code. The NIIT sits in Chapter 2A (§1411). Both treaties’ credit clauses are subject to a “U.S. law limitation,” so they incorporate that Chapter 1 limit rather than creating an independent NIIT offset. Being a “covered” income tax under a treaty does not automatically unlock an FTC against every U.S. levy. Ordinary Form 1116 credits against Chapter 1 income tax remain a separate analysis.

What US CPA firms should tell clients

• Run Form 8960 early for sale-heavy years. Compare projected NII to MAGI over the $200,000 / $250,000 / $125,000 thresholds before locking December trades.
• Separate NII from MAGI levers. Timing capital gains and passive K-1 items changes the NII base; Roth conversions and taxable IRA distributions mainly move MAGI.
• Do not net treaty FTCs against NIIT. After Bruyea and Christensen, treat protective refund claims that rested on the CFC wins as high-risk; align cross-border files with Chapter 1 vs Chapter 2A.
• Watch estimated tax. The IRS states NIIT is subject to estimated-tax rules; withholding on wages does not automatically cover it.
• Keep pass-through character straight. Active §162 trade-or-business income that is nonpassive (and not a trading business) is generally outside NII; passive K-1 flow-throughs are not. QBI and material-participation workpapers can overlap the same entities—see our 2026 QBI deduction §199A guide.

A short firm checklist

1. Flag clients with MAGI near or above the statutory NIIT thresholds and any planned year-end capital-gain realizations.
2. Inventory NII categories (interest, dividends, Schedule D, passive Schedule E, trader income) separately from MAGI-only items (taxable IRA/401(k) distributions, wages).
3. Confirm Form 8960 is in the e-file package whenever MAGI exceeds the threshold and NII is greater than zero; map line 17 to Schedule 2, line 12.
4. For U.S. citizens abroad with Canada or France (or similar treaty) credits, document that FTCs reduce Chapter 1 tax only—not NIIT—consistent with the Federal Circuit and IRS Q&A #17.
5. Revisit any open refund claims that relied on the reversed Court of Federal Claims NIIT-FTC theories.

Where this fits for Tax Brew readers

NIIT compliance is Form 8960 math, MAGI modeling and—after Bruyea—clear Chapter 1 versus Chapter 2A credit lines. If your firm needs capacity on that preparation work, outsourced tax prep and bookkeeping support for US CPA firms can help. Email info@taxbrewglobal.com.

Sources: IRC §1411; IRS Net Investment Income Tax page; IRS Questions and Answers on the Net Investment Income Tax; Instructions for Form 8960 (2025); Estate of Paul Bruyea v. United States, No. 2025-1563 (Fed. Cir. Aug. 31, 2026); Christensen v. United States, No. 2024-1284 (Fed. Cir. Aug. 31, 2026); KPMG TaxNewsFlash (Aug. 31, 2026); Manasa Nadig, EA (Oct. 8, 2026). General information, not tax or legal advice. Sources as of 15 October 2026.