Just when you think you’re done with taxes, there’s another one to consider—the Net Investment Income Tax (NIIT). This 3.8% tax often catches high-income earners off guard, especially when dealing with investment income. If you’re not aware of how it works, you might be paying more in taxes than you expected.

What is the Net Investment Income Tax (NIIT)?

The NIIT was introduced in 2013 as part of the Affordable Care Act to generate additional revenue. It applies to individuals, estates, and trusts that meet certain income thresholds. Unlike many other taxes, these thresholds have never been adjusted for inflation, meaning more people find themselves paying this tax each year.

Who Pays the NIIT?

This tax applies to individuals whose modified adjusted gross income (MAGI) exceeds the following thresholds:

• $200,000 for single filers
• $250,000 for married couples filing jointly
• $15,650 for estates and trusts (a much lower threshold)

If your income exceeds these amounts, your investment income could be subject to the additional 3.8% tax.

What Counts as Investment Income?

The NIIT only applies to certain types of income, including:
 Interest from savings accounts, CDs, and money market funds
 Dividends from stocks
 Capital gains from selling investments, real estate, or businesses
 Passive rental income
 Taxable annuity payments (excluding those from IRAs)
 Royalty income

For high-income individuals with significant investment portfolios, the NIIT can add a significant tax burden to their overall liability.

What Income is NOT Subject to the NIIT?

Not all income is affected by the NIIT. Some common sources of income that do not incur the 3.8% tax include:
 Wages and self-employment income
 Social Security benefits
 Pension and IRA distributions
 Roth IRA withdrawals
 Income from active business participation
 Life insurance proceeds
 Municipal bond interest

However, while this income isn’t subject to the NIIT, it still counts toward determining whether you exceed the income threshold. This means that even if your income itself isn’t taxed at 3.8%, it could push you into a range where your investment income is.

How to Plan Around the NIIT

If you’re a high-income earner with investment assets, proactive tax planning can help minimize your NIIT exposure. Some strategies include:
✅ Roth Conversions – Since Roth IRA withdrawals are tax-free, shifting funds from a traditional IRA to a Roth IRA can help reduce taxable investment income.
✅ Municipal Bonds – Interest from municipal bonds is not subject to the NIIT or ordinary income taxes.
✅ Timing Capital Gains – Spreading capital gains over multiple years or utilizing tax-loss harvesting can reduce your taxable investment income.
✅ Gifting Investments – Giving investments to family members in lower tax brackets can help reduce your exposure to the NIIT.

Why This Matters for 2025

The NIIT thresholds remain unchanged, and with inflation pushing incomes higher, more taxpayers will be subject to this tax than ever before. If you regularly earn investment income, now is the time to evaluate how it affects your overall financial plan.

 Need Help With Tax Planning?
At Cardinal Advisors, we specialize in tax-efficient retirement and investment strategies. Let’s make sure you’re not paying more in taxes than necessary.

 Watch our latest video to learn more about the Net Investment Income Tax and how it applies to your 2025 tax planning.