Your Guide to Net Investment Income Tax (NIIT)

Investing is a core pillar of building wealth. But, if you’re not careful, taxes like the net investment income tax (NIIT) can eat away at your gains over time and make it harder to reach your financial goals. 

This detailed guide will discuss everything that you need to know about the net investment income tax (NIIT), when you need to pay it, and how you can reduce it.
For customized advice about how the NIIT might impact you please be sure to contact the ARQ Wealth team by calling (480) 214-9572. ARQ Wealth’s financial advisors can help you reach your financial goals and minimize your tax burden.

What is Net Investment Income Tax?

The net investment income tax is a 3.8% tax on investment gains that applies to individuals, estates, and trusts that meet certain income thresholds. This tax applies to the lesser of either: 

1. Your net investment income
2. The amount that your modified adjusted gross income (MAGI) exceeds the statutory threshold amount. 

Don’t worry if this sounds confusing, we’ll look at a few detailed examples later in this article. Before we do, let’s discuss the NIIT in more detail.

Who Has to Pay the NIIT?

If you earned income from investments, you might be responsible for paying the net income tax. However, you only need to pay if you exceed the following income threshold amounts:

1. Married couples that file taxes jointly: $250,000
2. Married that file taxes separately: $125,000
3. Single: $200,000
4. Head of household (with qualifying person): $200,000
5. Qualifying widow(er) with dependent child: $250,000

Per the IRS, the net investment income tax only applies to the following types of investment income:

1. Interest
2. Dividends
3. Capital gains from the sale of stock, bonds, mutual funds, and other investments
4. Rental and royalty income
5. Non-qualified annuities

If you earned these forms of income (and meet the income thresholds listed in the previous section) then you will have to pay net investment income tax. 

The NIIT does not apply to the following forms of income:

1. Wages
2. Unemployment compensation
3. Social Security Benefits
4. Alimony
5. Self-employment income
6. Tax-exempt interest income
7. Income from certain qualified retirement plan distributions

Income from these types of income will not be subject to the NIIT (even if you meet the criteria above). That said, the NIIT is not just for individuals – it also applies to estates and trusts.

Paying NIIT Through an Estate or Trust

Estates and trusts might also be required to pay the NIIT. But only if they have both undistributed net investment income and adjusted gross income past the dollar amount at which the highest estate/trust tax bracket begins for the current tax year.  In 2025, the highest estate/trust bracket is $15,650.

However, the following types of trusts do not have to pay the NIIT:

• Trusts that are not technically classified as “trusts”
• Trusts that are exempt from income taxes for federal income tax purposes 
• Grantor trusts
• Perpetual care trusts

The IRS also offers special rules for qualified funeral trusts, charitable remainder trusts, and electing small business trusts. For more information about how the NIIT impacts different estates and trusts, contact a financial advisor at ARQ Wealth. 

How to File the NIIT

There are two factors you need to determine when figuring out if you need to pay the NIIT:  

1. Your modified adjusted gross income (MAGI)
2. Your net investment income (NII)

You calculate your modified adjusted gross income (MAGI) by taking your adjusted gross income (AGI) and adding back in deductions like IRA contributions, student loan interest, Social Security payments, and more. 

You can calculate your net investment income (NII) by taking your gross investment income (which you can access via your brokerage or financial advisory) and subtracting eligible deductions like brokerage fees, advisory fees, costs related to rental or royalty income, and more. 

Once you have both of these figures, you’ll need to determine which is lower:

1. Your net investment income
2. The amount by which your MAGI surpasses the IRS filing status threshold 

You’ll only be required to pay taxes on the smaller amount. Let’s take a look at three different examples of how this works.

NIIT Example #1: Single Filer

Let’s say you are a single filer earning $100,000 in regular income and $20,000 in net investment income (NII). Your total modified adjusted gross income (MAGI) would be $120,000. 

Since your $120,000 MAGI is below the $200,000 IRS threshold for single filers (see first section), you are not required to pay the NIIT. 

NIIT Example #2: Single Filer

Now, suppose you are a single filer earning $150,000 and making an additional $90,000 in NII. Your total MAGI would be $240,000, which is $40,000 higher than the IRS threshold of $200,000. You would be required to pay 3.8% on $40,000 and would owe $1,520 in NIIT.

You would owe tax on $40,000 (the amount that your MAGI surpasses the IRS threshold) because it is smaller than your NII (which is $90,000).

NIIT Example #3: Married, Filing Jointly

Let’s say that you and your spouse are filing taxes together. You earn a combined income of $300,000 and an additional $50,000 in NII. Your total MAGI would be $350,000, which is $100,000 higher than the IRS threshold of $250,000. You would be required to pay 3.8% on $50,000 and would owe $1,900 in NIIT.

You would owe tax on your $50,000 NII because this is smaller than the amount that your MAGI surpasses the IRS threshold which is $100,000.

Now, let’s examine how you can potentially reduce your NIIT.

Reducing Your NIIT Obligation

There are several ways to lower the amount you might owe in NIIT. 

One option is to make better use of qualified retirement plans. Qualified retirement plans are not subject to the NIIT, so leveraging these investment tools can help you avoid the NIIT altogether. 

Another option is to sell off income-producing investments and counterbalance them with growth stocks. This can help you reduce your MAGI and potentially avoid paying the NIIT. 

For example, rebalancing your investment portfolio to emphasize growth stocks over dividend-paying stocks could help reduce the amount of NIIT you might pay on dividends each year. You wouldn’t avoid the tax entirely because capital gains are still subject to the NIIT. But, you could defer the tax because you will not owe the NIIT tax until you sell your stocks and realize your gains. 

Navigate the NIIT With ARQ Wealth

It can be easy to get caught up in minimizing your tax burden and—don’t get us wrong—this is a critical part of wealth management. However, the most important aspect of financial planning is ensuring that you are prioritizing your financial goals and taking strategic steps to reach your investing objectives. 

For example, shifting from dividend-paying stocks to growth stocks can help you avoid paying the NIIT tax. But, it could also expose you to a significantly higher risk level (since growth stocks are riskier than dividend stocks). If you’re approaching retirement, the upside of saving on a 3.8% tax likely isn’t worth the added downside risk of owning growth stocks.

This type of scenario modeling is why it’s so important to speak directly with a financial advisor. An advisor can offer customized advice to help you reach your financial goals while mitigating your tax burden.

For customized advice about how the NIIT might impact you, please contact the ARQ Wealth team or call (480) 214-9572 to speak with a wealth manager.