How to Avoid the Net Investment Income Tax in 2026

There is a 3.8% tax on investment income that most people do not know about until they see it on their return. It is called the Net Investment Income Tax (NIIT), and it hits you on top of regular income tax and capital gains tax.

The NIIT was created in 2013 to help fund the Affordable Care Act. Over a decade later, its thresholds have never been adjusted for inflation. That means more Americans get caught by it every year as wages and investment returns push them above the fixed limits.^[1]

In 2026, with the One Big Beautiful Bill Act leaving the NIIT untouched, it is more important than ever to understand how it works and what you can do about it.

What Is the NIIT?

The Net Investment Income Tax is a 3.8% surtax on investment income for individuals, estates, and trusts with income above certain thresholds. It was enacted as part of the Health Care and Education Reconciliation Act of 2010 and went into effect January 1, 2013.^[2]

The tax equals 3.8% of the lesser of:

• Your net investment income, OR
• The amount by which your modified adjusted gross income (MAGI) exceeds the threshold for your filing status

This means you only pay the NIIT on the smaller of your investment income or the amount over the threshold.

2026 NIIT Thresholds

Filing Status	MAGI Threshold
Single	$200,000
Married Filing Jointly	$250,000
Married Filing Separately	$125,000
Head of Household	$200,000
Qualifying Surviving Spouse	$250,000
Estates and Trusts	$16,000

These thresholds are not indexed for inflation. They have been the same since 2013. In real terms, that $200,000 single filer threshold is worth about $155,000 in 2013 dollars. Each year, more taxpayers cross these thresholds simply due to wage growth and investment returns.

Effective NIIT Threshold (Inflation-Adjusted, Single Filer)

Recommended read: Lower Your Taxes - BIG TIME! by Sandy Botkin. A former IRS attorney reveals the tax strategies that legally minimize investment and business income taxes, with specific sections on surtax planning.

What Income Is Subject to the NIIT?

Taxable Investment Income (Subject to NIIT)

• Interest income (savings accounts, bonds, CDs)
• Dividend income (both qualified and ordinary)
• Capital gains (short-term and long-term)
• Rental and royalty income (net of deductions)
• Non-qualified annuity income
• Passive business income (business activities where you do not materially participate)
• Gains from selling investment property

Income NOT Subject to the NIIT

• Wages and salaries (these are subject to the 0.9% Additional Medicare Tax instead)
• Self-employment income from an active business
• Social Security benefits
• Tax-exempt municipal bond interest
• Distributions from IRAs and 401(k)s (these were taxed going in or will be taxed coming out)
• Veterans’ benefits
• Active business income from S-corps, partnerships, and LLCs where you materially participate

Common Income Sources: NIIT vs Not NIIT

How to Calculate the NIIT

The calculation has two steps:

Step 1: Calculate the excess of MAGI over your threshold.

Step 2: Take the lesser of your net investment income or the Step 1 amount. Multiply by 3.8%.

Example 1: Single Filer

• MAGI: $230,000
• Net investment income: $50,000
• Excess over threshold: $230,000 - $200,000 = $30,000
• NIIT: 3.8% × $30,000 = $1,140

The tax is on $30,000, not the full $50,000, because the excess over the threshold is smaller.

Example 2: Married Filing Jointly

• MAGI: $400,000
• Net investment income: $80,000
• Excess over threshold: $400,000 - $250,000 = $150,000
• NIIT: 3.8% × $80,000 = $3,040

Here the full investment income is taxed because it is smaller than the $150,000 excess.

Example 3: Big Capital Gain Year

• MAGI: $600,000 (including $300,000 capital gain from selling a rental property)
• Net investment income: $320,000
• Excess over threshold (single): $600,000 - $200,000 = $400,000
• NIIT: 3.8% × $320,000 = $12,160

Scenario	MAGI	Investment Income	NIIT Owed
Single, moderate	$230,000	$50,000	$1,140
Married, high income	$400,000	$80,000	$3,040
Single, property sale	$600,000	$320,000	$12,160

7 Legal Strategies to Reduce or Avoid the NIIT

Strategy 1: Maximize Tax-Deferred Retirement Contributions

Contributions to traditional 401(k)s, 403(b)s, and SEP IRAs reduce your MAGI. The 2026 limits are generous:

• 401(k)/403(b): $23,500 ($31,000 if 50+, $34,750 if 60-63 super catch-up)
• SEP IRA: Up to $70,000
• HSA: $4,300 single, $8,550 family

A married couple maxing out two 401(k)s reduces MAGI by $47,000, potentially dropping below the $250,000 threshold entirely.

Strategy 2: Invest in Tax-Exempt Municipal Bonds

Municipal bond interest is exempt from the NIIT calculation. It does not count as net investment income AND it does not increase your MAGI.^[3]

If you are in the 32% federal bracket plus the 3.8% NIIT, a 3.5% muni bond is equivalent to roughly 5.5% on a taxable bond. In high-tax states like California or New York, the equivalent taxable yield is even higher.

Strategy 3: Time Your Capital Gains

If you are near the threshold, spreading capital gains across multiple tax years can keep you below the NIIT line each year. Instead of selling $200,000 of stock in one year, sell $100,000 this year and $100,000 next year.

Similarly, harvest capital losses aggressively (just watch for wash sale rules) to offset gains in high-income years.

Strategy 4: Qualify as a Real Estate Professional

If you spend more than 750 hours per year and more than 50% of your working time on real estate activities, you can qualify as a real estate professional. This reclassifies rental income from passive (subject to NIIT) to active (exempt from NIIT).^[4]

This strategy requires documentation. Keep a detailed time log of all real estate activities.

Strategy 5: Roth Conversions in Low-Income Years

Converting traditional IRA funds to a Roth IRA in a low-income year (sabbatical, career change, early retirement) does not create investment income for NIIT purposes. The conversion is taxed as ordinary income, but future growth and withdrawals from the Roth are completely tax-free and exempt from NIIT.

Strategy 6: Charitable Strategies

• Qualified Charitable Distributions (QCDs): If you are 70½ or older, donate up to $105,000 from your IRA directly to charity. It satisfies your required minimum distribution without increasing your MAGI.
• Donor-Advised Funds: Bunch several years of charitable giving into one year to maximize the deduction and reduce MAGI below the threshold.
• Charitable Remainder Trusts: Transfer appreciated assets to a CRT, avoid immediate capital gains, receive an income stream, and get a charitable deduction.

Strategy 7: Installment Sales

Instead of selling a rental property or business in one year (creating a massive capital gain), structure an installment sale to spread the gain over several years. Each year’s gain is smaller, potentially staying below the NIIT threshold.

NIIT Reduction Potential by Strategy

Recommended read: The White Coat Investor by James M. Dahle. Written for high-income professionals who face the NIIT, covering asset location, tax-efficient fund placement, and strategies to shelter investment income from unnecessary taxation.

How the NIIT Interacts With Other Taxes

The NIIT does not exist in a vacuum. Understanding how it stacks with other taxes helps you see the true cost of investment income.

Total Tax on Long-Term Capital Gains

Taxable Income (Single)	Capital Gains Rate	NIIT	Total
Under $48,475	0%	0%	0%
$48,475 - $200,000	15%	0%	15%
$200,000 - $539,900	15%	3.8%	18.8%
Over $539,900	20%	3.8%	23.8%

At the top end, you pay nearly 24% federal tax on long-term capital gains. Add state taxes (up to 13.3% in California) and the effective rate can exceed 37%.

NIIT vs Additional Medicare Tax

The 0.9% Additional Medicare Tax applies to wages above $200,000 (single) or $250,000 (married). The NIIT applies to investment income above those same thresholds. They are separate taxes on different types of income, but both use the same MAGI thresholds.

NIIT and AMT

The NIIT is calculated independently of the Alternative Minimum Tax. You can owe both. The NIIT applies on top of your regular tax or AMT, whichever is higher. Use our AMT Calculator to check your AMT exposure.

Estate and Trust NIIT

Estates and trusts face a much lower NIIT threshold of just $16,000 in 2026. This means virtually all investment income earned inside a trust is subject to the 3.8% surtax.

Strategies to minimize trust NIIT:

• Distribute income to beneficiaries. Distributed income is taxed at the beneficiary’s rate and threshold, which is much higher than the trust’s $16,000 limit.
• Invest in tax-exempt bonds within the trust.
• Time distributions to the year when beneficiaries have lower income.

Recommended read: The Only Investment Guide You’ll Ever Need by Andrew Tobias. A witty, practical guide covering everything from tax-advantaged accounts to municipal bonds, with specific advice on minimizing the tax drag on your investment returns.

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