Do tax credits reduce the 3.8% net investment income tax? What the IRS says about solar and other credits
By the Tax Field Guide editorial team. Published 2026-10-31. Facts checked 2026-10-31. Related strategies: Solar Investment Credits, Purchased Energy Credits, Accelerated Depreciation, Tax-Loss Harvesting.
Education only; not tax, legal or investment advice. Tax rules change, and how they apply depends on your facts. No outcome is guaranteed.
High earners with investment income often ask whether a credit, such as a solar investment credit, can lower the 3.8% net investment income tax (NIIT). The IRS answers this directly, and the answer surprises people who expect a credit to reduce "the tax bill" generally. This guide covers what the NIIT is, what the IRS says about credits, and which items do change it.
What the NIIT is
The NIIT is imposed by section 1411 of the Internal Revenue Code at 3.8% on certain net investment income of individuals, estates and trusts above statutory thresholds.1 For an individual, the tax applies to the lesser of net investment income or the amount by which modified adjusted gross income (MAGI) exceeds the threshold for the filing status:2
| Filing status | Threshold |
|---|---|
| Married filing jointly | $250,000 |
| Married filing separately | $125,000 |
| Single or head of household | $200,000 |
| Qualifying widow(er) with a dependent child | $250,000 |
The IRS notes that these thresholds are not indexed for inflation.2 You report the tax on Form 8960, and it is paid with the Form 1040.2
What counts as net investment income
The IRS says investment income generally includes interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading financial instruments or commodities, and income from businesses that are passive activities to the taxpayer under section 469.2
It generally does not include wages, unemployment compensation, operating income from a nonpassive business, Social Security benefits, alimony, tax-exempt interest, self-employment income, and distributions from certain qualified retirement plans.2 That is why the passive or nonpassive label matters beyond loss limits. See material participation and how to reduce taxes on passive income.
What the IRS says about credits
The IRS's question and answer on this topic is plain. "Any federal income tax credit that may be used to offset a tax liability imposed by subtitle A of the Code may be used to offset the NII. However, if the tax credit is allowed only against the tax imposed by chapter 1 of the Code (regular income tax), those credits may not reduce the NIIT." It gives two examples of credits that cannot: "foreign income tax credits (sections 27(a) and 901(a)) and the general business credit (section 38)."2
The investment credit is one of the credits that make up the general business credit.3 A solar investment credit that you claim on Form 3468 flows through Form 3800 as a general business credit. See Form 3468 and Form 8582-CR for solar investors. Under the IRS's answer, that credit reduces your regular income tax but not the NIIT. The same logic would apply to a credit bought from another taxpayer and carried to your return; see buying transferable solar tax credits, where the passive activity limit is the first question.
An IRS example, and what a credit would change
The IRS gives this example for a single taxpayer: $180,000 of wages and $90,000 from a passive partnership interest, which is net investment income. MAGI is $270,000, which is $70,000 over the $200,000 threshold. The NIIT is based on the lesser of $70,000 or $90,000, so the taxpayer owes $2,660 ($70,000 times 3.8%).2
A general business credit in that example could reduce regular income tax, subject to its own limits, but the $2,660 would be unchanged, because the credit is allowed only against the chapter 1 tax.
What does change the NIIT
The NIIT has two levers, net investment income and MAGI, so items that move either can matter:
- Gains offset by capital losses. The IRS describes gains as included "to the extent that gains are not otherwise offset by capital losses."2 See tax-loss harvesting.
- Deductions properly allocable to investment income. The IRS lists examples that may include investment interest expense, expenses related to rental and royalty income, and state and local income taxes.2
- Gain excluded from income. Gain excluded under the section 121 home sale exclusion is not net investment income.2
- Lower MAGI. Anything that lowers adjusted gross income lowers the amount above the threshold on which the tax is figured, though it does not change what counts as investment income.
- Nonpassive treatment. Operating income from a nonpassive business is not net investment income, but passive-activity business income is.2
Whether any of these helps depends on facts that a professional has to review. See how to find and vet a tax mitigation advisor.
Why this matters for marketing claims
Promotions for credits and deductions often say they "eliminate taxes" for high earners. The NIIT is a separate tax with its own base. A pitch that does not say which tax a credit reduces, and which tax it leaves in place, is leaving out a basic fact. Compare it with Can solar tax credits offset W-2 income?.
Common questions
Does the solar tax credit reduce the net investment income tax?
No. The IRS says credits allowed only against the regular income tax imposed by chapter 1, including the general business credit under section 38, may not be used to reduce the NIIT. A solar investment credit is part of the general business credit.
What is the net investment income tax threshold?
For modified AGI, $250,000 for married filing jointly, $125,000 for married filing separately, and $200,000 for single and head of household filers. The IRS notes these thresholds are not indexed for inflation.
Which credits can reduce the NIIT?
The IRS says a credit that can offset a tax imposed by subtitle A of the Code can offset the NIIT, unless it is allowed only against the chapter 1 regular tax. Foreign income tax credits and the general business credit are examples of credits that cannot.
Is rental income subject to the NIIT?
The IRS lists rental and royalty income as net investment income, reduced by deductions properly allocable to it. Income from a business that is a passive activity to you is also included.
Education only; not tax, legal or investment advice.
Sources
- 26 U.S.C. §1411, https://www.law.cornell.edu/uscode/text/26/1411
- IRS, Questions and Answers on the Net Investment Income Tax, https://www.irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax
- 26 U.S.C. §38(b)(1), https://www.law.cornell.edu/uscode/text/26/38