The net investment income tax (NIIT) is a 3.8% surtax that applies to certain types of investment income for high-income individuals, estates, and trusts. Introduced in 2010, this surtax can often creep up on investors and high earners, so it’s important to understand how NIIT works, who it affects, and strategies to reduce its impact.

What Is Net Investment Income Tax?

• Definition: NIIT is an additional 3.8% tax on net investment income (NII) or on the excess of modified adjusted gross income (MAGI) above IRS thresholds, whichever is lower.
• Applies to: Individuals, estates, and trusts with income above statutory thresholds.

NIIT Thresholds for Individuals

For estates and trusts, NIIT applies if:

• They have undistributed net investment income
• Their adjusted gross income (AGI) exceeds the top tax bracket threshold, which is $15,650 in 2025.

What Counts as Net Investment Income?

The following are included in NII:

• Capital gains
• Dividends
• Interest
• Rental income
• Royalties
• Passive business income
• Non-qualified annuity distributions 

However, the following income sources are excluded from NII:

• Wages and self-employment income
• Qualified retirement plan distributions
• Social Security benefits
• Tax-exempt interest
• Alimony
• Unemployment benefits
• Gains from sale of a primary residence (up to exclusion limits) 

How to Calculate NIIT

If you qualify for the NIIT and are wondering how much you owe, calculating takes just a few steps:

1. Check MAGI: Compare your MAGI to the IRS threshold for your tax filing status.
2. Calculate NII: Add all included investment income, subtract eligible deductions.
3. Determine Tax Base: NIIT applies to the lesser of:
   1. Net Investment Income (NII), OR
   2. MAGI above the threshold.
4. Apply 3.8% Rate: Multiply the tax base by 0.038. 

Here’s an example of what a NIIT calculation for a single tax filer might look like:

• MAGI = $250,000
• Threshold = $200,000 → Overage = $50,000
• NII = $30,000
• NIIT applies to $30,000 (lesser amount) → Tax = $1,140 

Strategies to Reduce NIIT

There are a number of ways you can potentially reduce your NIIT burden. Here are a few:

• Time capital gains wisely: Realize gains in lower-income years.
• Tax-loss harvesting: Offset capital gains with realized losses, which can reduce NII and may help lower overall MAGI.
• Asset allocation: Hold capital-gain-producing assets in tax-deferred accounts (IRAs, Roth IRAs).
• Alternative investments: Consider exchange funds or real estate for diversification and potential tax benefits.
• Charitable remainder trusts (CRTs): CRTs are exempt from NIIT, allowing tax-efficient charitable giving.
• Maximize retirement contributions: Contribute to tax-deferred accounts such as 401(k)s, 403(b)s, and Traditional IRAs. These contributions reduce taxable income, which in turn lowers MAGI.
• Contribute to a health savings account (HSA): HSA contributions are deductible and can reduce MAGI. HSAs also provide triple tax benefits: deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.
• Charitable contributions: Charitable contributions can reduce taxable income when you itemize tax deductions. Using appreciated securities for donations can also avoid capital gains.
• Review timing of income and deductions: Deferring income (such as bonuses or Roth conversions) to a future year or accelerating deductible expenses can help manage MAGI in high-income years.
• Invest in municipal bonds: Municipal bond interest is generally excluded from MAGI for NIIT purposes.
• Business expense optimization: For pass-through entities, ensure legitimate business expenses are fully utilized to reduce taxable income.

Why Work with a Financial Advisor?

NIIT planning requires careful coordination of tax planning, investment management, and estate strategies. A Wealth Enhancement advisor can help you: 

• Identify exposure to NIIT
• Optimize asset location and timing of gains
• Explore advanced strategies like CRTs or exchange funds 

Key Takeaway

The net investment income tax (NIIT) is a hidden tax that can significantly affect high-income earners and investors. By understanding what income is included, how NIIT is calculated, and proactive planning strategies with a qualified, experienced financial advisor, you can reduce your liability and protect your wealth. Reach out today to learn how we can help.

Frequently Asked Questions about NIITs

What is the Net Investment Income Tax (NIIT)?
The net investment income tax (NIIT) is an additional 3.8% surtax that applies to certain types of investment income for high income individuals, estates, and trusts. It is based on the lesser of your net investment income or the amount that your modified adjusted gross income (MAGI) exceeds IRS income thresholds.

Who has to pay NIIT?
NIIT applies to individuals whose MAGI is above specific thresholds, and to estates and trusts with both undistributed net investment income and adjusted gross income (AGI) above the top tax bracket threshold. For 2025, the AGI threshold for estates and trusts is $15,650.

What are the NIIT income thresholds for different filing statuses?
For individuals, NIIT can apply when MAGI exceeds:

• $200,000 for Single or Head of Household
• $250,000 for Married Filing Jointly
• $125,000 for Married Filing Separately

What types of income are subject to NIIT?
Net investment income (NII) includes capital gains, dividends, interest, rental income, royalties, passive business income, and non qualified annuity distributions. These are the income types that may be subject to the 3.8% NIIT when you are over the income threshold.

What types of income are not subject to NIIT?
NIIT does not apply to wages and self employment income, qualified retirement plan distributions, Social Security benefits, tax exempt interest, alimony, unemployment benefits, and gains from the sale of a primary residence up to the usual exclusion limits.

How do you calculate how much NIIT you owe?
To calculate NIIT, you compare your MAGI to the IRS threshold for your filing status, calculate your net investment income, then apply the 3.8% tax to the lesser of:

1. your net investment income, or
2. the amount your MAGI exceeds the threshold.
   For example, a single filer with $250,000 MAGI and $30,000 of net investment income would owe NIIT on $30,000, which equals $1,140.

What strategies can help reduce NIIT?
Potential ways to reduce NIIT include timing capital gains for lower income years, tax loss harvesting, placing capital gain producing assets in tax deferred accounts, using alternative investments like exchange funds or real estate, and using charitable remainder trusts, which are exempt from NIIT.

How can retirement and HSA contributions affect NIIT exposure?
Maximizing contributions to tax deferred retirement accounts such as 401(k)s, 403(b)s, and Traditional IRAs can lower taxable income and therefore MAGI, which may reduce NIIT exposure. Contributions to a health savings account (HSA) are also deductible, reduce MAGI, and offer triple tax benefits on contributions, growth, and qualified withdrawals.

Can charitable giving help lower NIIT?
Yes. Charitable contributions can reduce taxable income when you itemize deductions, which can help bring MAGI below NIIT thresholds. Donating appreciated securities can also avoid realizing capital gains that would otherwise increase net investment income.

Why should I work with a financial advisor on NIIT planning?
NIIT planning involves coordinating tax strategies, investment decisions, and estate planning. A Wealth Enhancement advisor can help identify your exposure to NIIT, optimize where you hold different assets, time capital gains, and evaluate advanced tools such as charitable remainder trusts or exchange funds to manage the impact of NIIT on your long term wealth.

Content in this material is for general information only and is not intended to provide individualized tax or legal advice. Discuss your specific situation with a qualified tax or legal professional.

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