It’s that time of year. Uncle Sam is coming to town. And if you’re a high earner with substantial investment income, you may owe a special tax.
It’s called the net investment income tax (NIIT).
What Is Net Investment Income Tax?
The NIIT is a 3.8 percent surtax. This tax applies to the lower of your net investment income or the amount by which your modified adjusted gross income (MAGI) exceeds certain thresholds.
For the 2025 and 2026 tax years, those thresholds are $200,000 for single filers and $250,000 for those married filing jointly.
How Is NIIT Calculated?
To better understand NIIT’s impact, let’s take a look at a few examples.
Say John is a single filer with net investment income of $200,000 and his MAGI exceeds the applicable threshold by $25,000. Because the amount by which his MAGI exceeds the threshold is lower than his net investment income, the 3.8 percent NIIT would apply to that extra $25,000. This calculates to $950 ($25,000 x 0.038).
Now let’s take a look at another scenario.
Say Mary has a net investment income of $50,000. But her MAGI exceeds the threshold by $150,000. In this case, the 3.8 percent NIIT applies to the lower net investment income of $50,000. That calculates to $1,900 ($50,000 x 0.038).
What Counts Toward NIIT?
To better understand whether you’d be subject to NIIT, let’s break it down. First, let’s look at net investment income. Most taxable investment income falls into this category, including the following:
- net capital gains from selling assets like stocks, mutual funds, and exchange-traded funds (ETFs) for a profit
- dividends from stocks and ETFs
- interest from bonds and other fixed-income investments
- passive business income from businesses you don’t actively participate in for more than 500 hours a year
- income from businesses involved in trading investments
- rental income
- royalty income
Now, let’s factor out the income that doesn’t count:
- qualified withdrawals from retirement plans like 401(k)s and IRAs
- tax-exempt interest including interest from municipal bonds
- gains from selling a primary residence up to $250,000 for single filers and $500,000 for married couples filing jointly
- income from a business you actively participated in for more than 500 hours a year
- wages
- bonuses
- unemployment benefit
- Social Security benefits
- life insurance payouts
So you’d need to add up your net investment income and MAGI to determine whether you’ll owe NIIT and by how much. However, there are plenty of ways to reduce or avoid NIIT.
The clearest approach is to reduce your MAGI and your net investment income. So let’s explore some options.
Max Out Tax-Deferred Accounts
If you’re contributing to a traditional IRA or 401(k), you can lower your MAGI by contributing as much as you can to these tax-deferred accounts.
For 2026, you can contribute up to $7,500 to a traditional IRA or $8,600 if you’re age 50 or older.
And for 2026, you can contribute up to $24,500 or $32,500 if you’re age 50 or older to a traditional 401(k).
And if you have a high-deductible health plan (HDHP), you can pair it with a health savings account (HSA). These can help you save and pay for qualified medical expenses tax-free. And your contributions could also lower your taxable income.
In 2026, you can contribute up to $4,400 for single coverage or $8,750 for family coverage.
Donate to Charity
You can donate appreciated assets like stocks that have been held for more than a year to a donor-advised fund. By doing so, you can deduct the fair market value of these assets up to 30 percent of your adjusted gross income (AGI). Moreover, you avoid facing capital gains on the appreciation of those assets. By lowering your AGI and avoiding capital gains, you could minimize or avoid the impact of the NIIT.
However, there are some new rules to consider thanks to the One Big Beautiful Bill Act. Donor-advised funds remain deductible for itemizers, but there are some new rules.
Itemizers who make charitable contributions can only claim a tax deduction based on qualified contributions that exceed 0.5 percent of AGI. So if your AGI is $300,000, you can only deduct charitable donations beyond $1,500 ($300,000 x 0.005).
And for donors in the top tax bracket of 37 percent, the value of itemized charitable deductions is capped at 35 percent.
But there are other ways to minimize NIIT’s hit via charitable giving.
If you’re at least 70 1/2 years old, you can donate up to $111,000 directly from your traditional IRA to one or more Internal Revenue Service-qualified charities as part of a qualified charitable distribution (QCD).
A QCD could replace your required minimum distribution (RMD). By doing so, it won’t count toward your taxable income.
Making a QCD could reduce your AGI. This in turn could help you stay below NIIT thresholds.
Invest in Tax-Efficient Assets
Interest from municipal bonds neither counts toward your net investment income nor is it used to calculate your MAGI. So you can speak to a financial adviser to discuss whether these may be a better fit in your portfolio than corporate and federal bonds for which interest is taxed.
Strategically Sell Real Estate
If you’re thinking about selling real estate, consider making an installment sale. This could allow you to spread your income and applicable taxes over several years. This move could steer you clear from going over NIIT thresholds.
Tax-Loss Harvesting
Capital gains are key factors in determining whether you’re subject to NIIT. So reducing or eliminating these can be greatly beneficial.
You could do this by engaging in tax-loss harvesting. This is the strategy of selling investments at a loss in order to offset gains from selling assets that have grown in value.
When your losses are greater than your gains, you essentially offset the entire capital gain.
And when losses exceed gains, up to $3,000 of these losses could be used to reduce ordinary income for the current year. The remaining losses can be carried forward to apply to future years.
For instance, if you have $10,000 in capital losses and $5,000 in capital gains, you have a net capital loss of $5,000 ($10,000 – $5,000). So you can use up to $3,000 to lower your taxable income for the current tax year. The leftover $2,000 ($5,000 – $3,000) can be used for future tax years.
The Bottom Line
The NIIT is a surtax that applies to high earners. It’s ultimately tied to your MAGI and net investment income. So to reduce or eliminate your NIIT, you can reduce both these figures. You may do so by maximizing tax-deductible contributions to retirement plans like IRAs, charitable giving, and making tax-efficient investments. But tax laws are complex and can change drastically. So it’s best to review these steps with a qualified tax adviser.
The Epoch Times copyright © 2026. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
