Curated by: Rubric Advisors
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.
Net Investment Income Tax (NIIT) & Medicare Surtax
1 / 6
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
Try Our Free Tools
Full Guide
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
Related Topics
Active Income vs Passive Income
The IRS classifies income as active or passive based on your level of participation, which determines how losses can be used and whether the 3.8% net investment income tax applies.
Tax PlanningEarned Income vs Unearned Income
Earned and unearned income are taxed differently and determine eligibility for Social Security credits, retirement contributions, and credits like the EITC.
Tax PlanningSelling Rental Property: Tax Playbook
Selling investment real estate may trigger multiple taxes including depreciation recapture, capital gains, NIIT, and state taxes, understanding each layer helps inform sale timing and deferral strategies.