How To Avoid NIIT
To avoid or reduce your liability for the Net Investment Income Tax (NIIT) in the U.S., you need to understand what it is and use legitimate tax strategies to minimize your exposure.
🧾 What is NIIT?
The Net Investment Income Tax (NIIT) is a 3.8% tax on the lesser of:
- Your net investment income, or
- The amount by which your modified adjusted gross income (MAGI) exceeds the threshold:
| 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
- Passive income from partnerships/S corporations
- Annuities (non-qualified)
Wages, Social Security, and active business income are not subject to NIIT.
✅ How to Avoid or Minimize NIIT
1. Reduce Your MAGI
- Max out retirement contributions (401(k), IRA, HSA): Lowers MAGI.
- Use pre-tax deductions (FSAs, dependent care, etc.).
- Charitable donations: Itemizing deductions may reduce taxable income.
2. Invest in Tax-Exempt or Tax-Deferred Vehicles
- Municipal bonds: Interest is tax-free and not subject to NIIT.
- Roth IRAs: Qualified withdrawals are not subject to NIIT.
- Annuities: Growth is tax-deferred (but may still be subject to NIIT when withdrawn).
- Life insurance: Cash value grows tax-deferred.
3. Harvest Tax Losses
Offset capital gains with capital losses to reduce net investment income.
4. Change Investment Strategy
- Favor qualified dividends and long-term capital gains, which are taxed at lower rates.
- Consider installment sales to spread gains over several years.
- Defer sales to lower-income years or bundle gains into years with MAGI under thresholds.
5. Group Real Estate as a Trade or Business
If you actively manage rental real estate and meet material participation requirements, you may avoid NIIT on that income by qualifying as a real estate professional.
6. Reallocate to Active Business Participation
If you materially participate in an S corporation or partnership, that income might not count as “net investment income” and may be excluded from NIIT.
📌 Key Takeaways
- Keep MAGI below NIIT thresholds when possible.
- Use tax-deferred or exempt investment vehicles.
- Restructure passive investments and manage capital gains wisely.