Tax Planning

Net Investment Income Tax (NIIT) & Medicare Surtax

High earners face two additional taxes above the standard rates: the 3.8% Net Investment Income Tax and the 0.9% Additional Medicare Tax. Understanding what triggers these surtaxes and how to manage exposure can save thousands annually.

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The 3.8% NIIT Explained

Applies to the LESSER of net investment income OR the amount by which MAGI exceeds the threshold
Thresholds: $250,000 (married filing jointly), $200,000 (single), NOT indexed for inflation
Investment income includes: interest, dividends, capital gains, rental income, royalties, passive business income
Does NOT apply to: wages, self-employment income, tax-exempt interest, retirement plan distributions

Strategies to Reduce NIIT

Shift investments to tax-exempt municipal bonds (interest is excluded from net investment income)
Maximize contributions to retirement accounts, distributions are not investment income for NIIT purposes
Consider installment sales to spread capital gains across multiple years and manage threshold exposure
Invest in qualified opportunity zone funds, deferred gains may reduce current-year NIIT exposure

MAGI Management Tactics

Charitable contributions to a donor-advised fund in high-income years can reduce MAGI
Timing of Roth conversions matters, conversions increase MAGI and can trigger or increase NIIT
Harvesting capital losses offsets gains and directly reduces net investment income
Business owners: material participation in a trade or business can reclassify income as non-passive (excludes from NIIT)

Key Takeaways

The NIIT and Medicare surtax thresholds are not inflation-adjusted, more taxpayers are affected each year
Proactive MAGI management and investment income timing can meaningfully reduce surtax exposure
Retirement account contributions and tax-exempt investments provide structural NIIT reduction
Work with a tax advisor to model your surtax exposure and develop a multi-year reduction strategy

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The 3.8% NIIT Explained

Applies to the LESSER of net investment income OR the amount by which MAGI exceeds the threshold
Thresholds: $250,000 (married filing jointly), $200,000 (single), NOT indexed for inflation
Investment income includes: interest, dividends, capital gains, rental income, royalties, passive business income
Does NOT apply to: wages, self-employment income, tax-exempt interest, retirement plan distributions

The 0.9% Additional Medicare Tax

Applies to wages and self-employment income above $250,000 (MFJ) or $200,000 (single)
Unlike NIIT, this surtax applies to earned income, not investment income
Employers withhold the additional 0.9% only on the individual employee's wages exceeding $200,000
For married couples with two earners, underwithholding is common and estimated payments may be needed

When Both Surtaxes Apply

A high-earning tech professional with significant investment income can face both taxes simultaneously
Combined effect: wages above threshold pay 0.9% surtax + investment income pays 3.8% NIIT
Example: $400K wages + $100K investment income → 0.9% on $150K wages + 3.8% on $100K NIIT
Total surtax exposure can easily exceed $5,000-$10,000+ annually for high earners

Strategies to Reduce NIIT

Shift investments to tax-exempt municipal bonds (interest is excluded from net investment income)
Maximize contributions to retirement accounts, distributions are not investment income for NIIT purposes
Consider installment sales to spread capital gains across multiple years and manage threshold exposure
Invest in qualified opportunity zone funds, deferred gains may reduce current-year NIIT exposure

MAGI Management Tactics

Charitable contributions to a donor-advised fund in high-income years can reduce MAGI
Timing of Roth conversions matters, conversions increase MAGI and can trigger or increase NIIT
Harvesting capital losses offsets gains and directly reduces net investment income
Business owners: material participation in a trade or business can reclassify income as non-passive (excludes from NIIT)

Key Takeaways

The NIIT and Medicare surtax thresholds are not inflation-adjusted, more taxpayers are affected each year
Proactive MAGI management and investment income timing can meaningfully reduce surtax exposure
Retirement account contributions and tax-exempt investments provide structural NIIT reduction
Work with a tax advisor to model your surtax exposure and develop a multi-year reduction strategy

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The information above is for educational purposes only and does not constitute investment advice, a recommendation, or a solicitation to buy or sell any security. Any historical figures are for illustration only, and past performance does not guarantee future results. Tax laws, regulations, and contribution limits change frequently, the details here may become outdated. Individual circumstances vary. Consult a qualified financial advisor, CPA, or attorney for guidance specific to your situation. Rubric Advisors is registered with the California DFPI; registration does not imply a certain level of skill or training.

Net Investment Income Tax (NIIT) & Medicare Surtax

The 3.8% NIIT Explained

The 0.9% Additional Medicare Tax

When Both Surtaxes Apply

Strategies to Reduce NIIT

MAGI Management Tactics

Key Takeaways

The 3.8% NIIT Explained

The 0.9% Additional Medicare Tax

When Both Surtaxes Apply

Strategies to Reduce NIIT

MAGI Management Tactics

Key Takeaways

Related Topics

Active Income vs Passive Income

Earned Income vs Unearned Income

Selling Rental Property: Tax Playbook

Net Investment Income Tax (NIIT) & Medicare Surtax

The 3.8% NIIT Explained

The 0.9% Additional Medicare Tax

When Both Surtaxes Apply

Strategies to Reduce NIIT

MAGI Management Tactics

Key Takeaways

The 3.8% NIIT Explained

The 0.9% Additional Medicare Tax

When Both Surtaxes Apply

Strategies to Reduce NIIT

MAGI Management Tactics

Key Takeaways

Related Topics

Active Income vs Passive Income

Earned Income vs Unearned Income

Selling Rental Property: Tax Playbook