Net Investment Income Tax (NIIT)

The Net Investment Income Tax (NIIT) is an additional 3.8% tax on certain investment income for individuals, estates, and trusts with income above specific thresholds.

Income Thresholds:

Filing Status	MAGI Threshold
Single	$200,000
Married Filing Jointly	$250,000
Married Filing Separately	$125,000
Head of Household	$200,000

What Counts as Net Investment Income:

• Interest
• Dividends
• Capital gains
• Rental and royalty income
• Non-qualified annuities
• Passive business income

What Does NOT Count:

• Wages and self-employment income
• Social Security benefits
• Tax-exempt interest (municipal bonds)
• Distributions from retirement plans (401k, IRA)
• Income from active business participation

How NIIT is Calculated: Tax = 3.8% × LESSER OF:

1. Net investment income, OR
2. MAGI exceeding threshold

Example Calculation: Married couple with:

• Wages: $200,000
• Dividends: $30,000
• Capital gains: $50,000
• MAGI: $280,000

Calculation:

• MAGI over threshold: $280,000 - $250,000 = $30,000
• Net investment income: $30,000 + $50,000 = $80,000
• NIIT base: Lesser of $30,000 or $80,000 = $30,000
• NIIT: $30,000 × 3.8% = $1,140

Strategies to Reduce NIIT:

1. Tax-loss harvesting - Reduce net investment income
2. Municipal bonds - Interest excluded from NII
3. Roth conversions - Timing to manage MAGI
4. Installment sales - Spread gains over years
5. Qualified Opportunity Zones - Defer/reduce gains
6. Real estate professional status - Convert passive to active

Total Tax on Long-Term Gains for High Earners:

• 20% capital gains rate
• 3.8% NIIT
• 23.8% total federal rate
• Plus state taxes in most states