How NIIT Works
NIIT applies a 3.8% tax to net investment income for taxpayers with modified adjusted gross income (MAGI) over $200,000 single or $250,000 married filing jointly. The thresholds are not indexed for inflation.
What counts as net investment income: interest, dividends, capital gains, rental income, royalties, non-qualified annuity distributions, and most passive business income. Net of allocable deductions (investment interest expense, certain advisory fees).
What does NOT count: wages, self-employment income, distributions from qualified retirement plans (Traditional IRA, 401(k), pension), active business income, municipal bond interest (federally tax-exempt).
The 3.8% applies to the LESSER of: (a) net investment income, or (b) MAGI minus the threshold. So if your MAGI is $210K with $50K of investment income, NIIT applies to only $10K (the amount above $200K threshold), not the full $50K. NIIT = $10K × 3.8% = $380.
If MAGI is $300K with $50K of investment income, NIIT applies to the full $50K (since the gap to threshold is $100K, larger than $50K). NIIT = $50K × 3.8% = $1,900.
Why NIIT Catches More Taxpayers Each Year
The $200K/$250K thresholds are not indexed for inflation. In 2010 dollars when NIIT was enacted, $200K was upper-middle-class income — top 3-4% of earners. Today in 2026 dollars, $200K is more like top 7-8% of earners. The same threshold catches a growing percentage of taxpayers every year.
Investment income has also grown faster than inflation in many cases. Capital gains from the strong stock market of the 2010s and early 2020s pushed many taxpayers above the threshold. Real estate appreciation similarly.
Combined effect: NIIT was supposed to be a 'rich person's tax.' By 2026 it's catching middle-class retirees with $50K-$100K of investment income who happen to have MAGI in the $200K range from a Social Security + pension + IRA combo.
Looking forward: the thresholds remain frozen. Each year of inflation reduces the real-dollar threshold further. By 2030, the equivalent 2010 threshold would be $250K+; the actual threshold remains $200K. This isn't accident — Congress has had multiple chances to index NIIT and has chosen not to.
Strategies to Reduce NIIT Exposure
Strategy 1: harvest losses to reduce net investment income. Tax-loss harvesting reduces realized gains, reducing the 'net' in net investment income. Carryforward losses to future years applies before NIIT.
Concrete example: $300K MAGI with $50K of capital gains and $30K of investment income (interest, dividends). Without harvesting, $80K of investment income × 3.8% = $3,040 NIIT. By harvesting $30K of losses, gains drop to $20K, total investment income to $50K. NIIT: $50K × 3.8% = $1,900. Savings: $1,140.
Strategy 2: time investment income across years. If your MAGI fluctuates (some years above $200K, some below), concentrate investment income in below-threshold years. A retiree with $180K of pension/SS and the option to realize $100K of capital gains can do so in a year when their pension is lower or other income is reduced — avoiding NIIT entirely.
Strategy 3: use municipal bond interest. Munis are exempt from both federal income tax AND NIIT. For high-bracket investors near or above the NIIT threshold, the after-tax yield comparison favors munis even more once NIIT is factored in.
Strategy 4: maximize contributions to tax-deferred accounts. Traditional 401(k), IRA contributions reduce AGI dollar-for-dollar. Reducing AGI from $260K to $230K via $30K of contributions might drop you below the threshold (for MFJ) entirely.
Strategy 5: HSA contributions. HSA contributions reduce AGI and are not subject to NIIT during the deferral period. Plus the triple tax advantage. For HSA-eligible filers, max contributions are a powerful way to reduce MAGI.
Real Estate and NIIT
Rental income is generally subject to NIIT. Rental losses are typically passive and limited (Section 469), but the losses DO reduce net investment income for NIIT purposes (in the year recognized).
Active real estate (REPS): Real Estate Professional Status converts passive rental losses to active losses. For NIIT purposes, this is double-edged — the active losses don't reduce 'net investment income' (since they're now active business income, not investment income). But REPS-qualified taxpayers also have non-rental investment income (stocks, bonds) that's separate.
Material participation in real estate: rental real estate trades or businesses with material participation are exempt from NIIT. So a real estate investor who actively manages their portfolio (REPS plus material participation) escapes NIIT on rental income entirely.
Real estate sales: gain on sale of investment real estate is investment income subject to NIIT. Primary residence gains within Section 121 exclusion ($250K/$500K) are NOT subject to NIIT — they're not even taxable for income tax purposes, so NIIT doesn't apply.
1031 exchanges: defer the gain (and thus NIIT). Useful for cycling through real estate without triggering NIIT each cycle.
Roth Conversions and NIIT
Roth conversions count as ordinary income, raising your AGI. They can push you across the $200K/$250K MAGI threshold. Once across the threshold, all your investment income is potentially subject to NIIT.
Concrete example: a retiree with $40K Social Security, $30K of investment income, $50K of Traditional IRA withdrawals = $120K AGI. Below NIIT thresholds, no NIIT. Now they decide to do a $100K Roth conversion. New AGI: $220K. NIIT applies to $20K (gap above threshold) at 3.8% = $760. The conversion itself isn't subject to NIIT (it's Traditional IRA distribution, not investment income), but it pushed the OTHER investment income across the threshold.
Strategic timing: do Roth conversions in years when investment income is low. If you've harvested losses or your dividend income is reduced, the AGI threshold matters less.
Multi-year planning: spread conversions across years to keep MAGI close to but below the threshold. A $200K conversion split across two years (December $100K, January $100K) can keep both years below NIIT threshold, while a single $200K conversion would trigger it.
Concrete planning: pre-RMD years (60-72) often have low base AGI from Social Security and discretionary IRA distributions. These are ideal years to do Roth conversions — you can stack significant conversion income while staying below NIIT threshold by careful timing.
NIIT for Self-Employed and Business Owners
Self-employment income is subject to SE tax (15.3%) but NOT to NIIT. Active business income from sole proprietorships, partnerships, and S-corps where you materially participate is also exempt.
Investment income WITHIN a business (interest on business bank accounts, dividends in business accounts) flows through to the owner. For active business owners materially participating, this investment income is generally exempt from NIIT.
Passive business income (limited partner interest, REIT dividends, distributions from businesses where you don't materially participate) IS subject to NIIT. Many silent business investors get caught by this.
Strategic implications: structure investments to favor active over passive characterization where possible. If you can elevate your involvement in a business from passive to active (regular meetings, decision-making authority, time invested), you can convert NIIT-subject income to NIIT-exempt income.
S-corp shareholders: distributions and W-2 wages from your own active S-corp are not investment income. Distributions are not subject to FICA or NIIT. This is one reason S-corps are particularly attractive vs other entity types — they bypass both SE tax (on distributions) and NIIT.