Net Investment Income: Investment Taxes (2025 IRS Guide)

This guide covers “Net Investment Income” within investment taxes. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 550 (2025), Investment Income and Expenses, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

Generally, your deduction for investment interest expense is limited to your net investment income.

You can carry over the amount of investment interest you could not deduct because of this limit to the next tax year. The interest carried over is treated as investment interest paid or accrued in that next year.

You can carry over disallowed investment interest to the next tax year even if it is more than your taxable income in the year the interest was paid or accrued.

Net Investment Income

Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income.

Investment income.

Generally, investment income includes your gross income from property held for investment such as interest, dividends, annuities, and royalties. Investment income does not include Alaska Permanent Fund dividends. It also does not include qualified dividends or net capital gain unless you choose to include them.

Choosing to include qualified dividends.

Investment income generally does not include qualified dividends, discussed in chapter 1. However, you can choose to include all or part of your qualified dividends in investment income.

You make this choice by completing Form 4952, line 4g, according to its instructions.

If you choose to include any of your qualified dividends in investment income, you must reduce your qualified dividends that are eligible for the lower capital gains tax rates by the same amount.

Choosing to include net capital gain.

Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). However, you can choose to include all or part of your net capital gain in investment income.

You make this choice by completing Form 4952, line 4g, according to its instructions.

If you choose to include any of your net capital gain in investment income, you must reduce your net capital gain that is eligible for the lower capital gains tax rates by the same amount.

For more information about the capital gains rates, see Capital Gain Tax Rates in chapter 4.

Qualified dividends and net capital gain.

Before making either choice, consider the overall effect on your tax liability. Compare the amount of tax you would owe if you make the election to include one or both of the amounts in income to the tax you would owe if you did not make the election.

Investment income of child reported on parent’s return.

Investment income includes the part of your child’s interest and dividend income you choose to report on your return. If the child does not have qualified dividends, Alaska Permanent Fund dividends, or capital gain distributions, this is the amount on line 6 of Form 8814. Include it on line 4a of Form 4952.

Example.

Your 8-year-old child has interest income of $2,800, which you choose to report on your own return. You enter $2,800 on Form 8814, lines 1a and 4, and $100 on lines 6 and 12, and complete Part II. You also enter $100 on Schedule 1 (Form 1040), line 8z. Your investment income includes this $100.

Child’s qualified dividends.

If part of the amount you report is your child’s qualified dividends, that part (which is reported on Form 1040, line 3a) generally does not count as investment income. However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends, earlier.

Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured next under Child’s Alaska Permanent Fund dividends).

Child’s Alaska Permanent Fund dividends.

If part of the amount you report is your child’s Alaska Permanent Fund dividends, that part does not count as investment income. To figure the amount of your child’s income that you can consider your investment income, start with the amount on Form 8814, line 6. Multiply that amount by a percentage that is equal to the Alaska Permanent Fund dividends divided by the total amount on Form 8814, line 4. Subtract the result from the amount on Form 8814, line 12.

Example.

Your 10-year-old child has taxable interest income of $4,000 and Alaska Permanent Fund dividends of $2,000. You choose to report this on your return. You enter $4,000 on Form 8814, line 1a; $2,000 on line 2a; and $6,000 on line 4. You then enter $3,300 on Form 8814, lines 6 and 12; and Schedule 1 (Form 1040), line 8z. You figure the amount of your child’s income that you can consider your investment income as follows.

• $3,300 − ($3,300 × ($2,000 ÷ $6,000)) = $2,200

You include the result, $2,200, on Form 4952, line 4a.

Child’s capital gain distributions.

If part of the amount you report is your child’s capital gain distributions, that part (which is reported on Schedule D (Form 1040), line 13; or Form 1040, line 7) generally does not count as investment income. However, you can choose to include all or part of it in investment income, as explained under Choosing to include net capital gain, earlier.

Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured under Child's Alaska Permanent Fund dividends, earlier).

Investment expenses.

Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income.

Losses from passive activities.

Income or expenses that you used in computing income or loss from a passive activity are not included in determining your investment income or investment expenses (including investment interest expense). See Pub. 925 for information about passive activities.

Example.

Ted is a partner in a partnership that operates a business. However, he does not materially participate in the partnership’s business. Ted’s interest in the partnership is considered a passive activity.

Ted’s investment income from interest and dividends (other than qualified dividends) is $10,000. His investment expenses (other than interest) are $3,200. His investment interest expense is $8,000. Ted also has income from the partnership of $2,000.

Ted figures his net investment income and the limit on his investment interest expense deduction in the following way.

The $2,000 of income from the passive activity is not used in determining Ted’s net investment income. His investment interest deduction for the year is limited to $6,800, the amount of his net investment income.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

• Publication 550 (2025), Investment Income and Expenses: Investment Expenses — Interest Expenses — Limit on Deduction — Net Investment Income — Internal Revenue Service; 2025 edition.

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.