In this study, iron (III) oxide (Fe3O4) nanoparticles were incorporated into dissolved polyethylene oxide to develop magnetic polymer nanocomposites with enhanced linear and nonlinear optical properties. This work focuses on understanding how doping with iron (III) oxide affects the crystallinity, magnetic behavior, and optical characteristics of the composites. Fourier Transform Infrared Spectroscopy analysis confirmed interactions between the nanoparticles and polymer functional groups. X-ray Diffraction results revealed increased amorphous content, with the full width at half maximum increasing from 0.371 to 0.742, indicating reduced crystallite size and higher structural disorder. At higher nanoparticle concentrations, weak crystalline peaks suggested nanoparticle agglomeration. Magnetic properties were thoroughly studied through magnetic hysteresis (B–H) curves. Optical band gaps determined by the Tauc model showed a significant decrease in the direct band gap from 5.4 eV to 1.72 eV and the indirect band gap from 4.78 eV to 1.41 eV. The refractive index and extinction coefficient indicated increased electric susceptibility and defect states. Using the Wemple–DiDomenico single oscillator model, key parameters such as oscillator energy decreased from 4.8 eV to 2.87 eV, static refractive index increased from 1.68 to 2.14, and dispersion energy rose with nanoparticle concentration, the moments of the optical transitions and increased from 1.83 to 0.078 to 3.61 and 0.43, respectively. Dielectric function analysis revealed increases in effective mass (from 2.46 × 1056 to 10.52 × 1056), high-frequency dielectric constant (from 3.39 to 7.93), and plasma frequency (from 4.57 × 107 to 6.18 × 107). Additionally, thermal emissivity and sheet resistance were evaluated to better understand light-matter interactions. These findings provide valuable insights for designing advanced materials with potential applications in energy storage, sensors, and electronic devices, which is crucial for the community.