Net Investment Income Tax (NIIT): The 3.8% Surtax on Investment Income and Planning Strategies for Business Owners

By Yarik Yarosh, CPA ·September 5, 2026 ·6 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

The 3.8% net investment income tax is one of the most overlooked taxes in a business owner’s total tax picture. Under IRC 1411, the NIIT applies to individuals, estates, and trusts with income above certain thresholds, and it specifically targets investment income and passive business income. The tax is computed on the lesser of (1) net investment income or (2) the excess of MAGI over the threshold ($200,000 single, $250,000 MFJ, $125,000 MFS). These thresholds aren’t indexed for inflation and have not changed since the NIIT took effect in 2013, meaning more taxpayers fall subject to it each year as incomes rise. The critical planning distinction is between “active” business income (exempt from NIIT) and “passive” or “investment” income (subject to NIIT). A business owner who materially participates in their business pays regular income tax and self-employment tax on the business income, but not the NIIT. The same owner’s rental income, dividend portfolio, and capital gains from stock sales are all subject to the NIIT if their MAGI exceeds the threshold. Understanding which income streams are subject to the NIIT (and which planning strategies can reduce or eliminate it) is essential for owners with income above $200,000/$250,000.

✓Key takeaway

NIIT computation:

Step	Calculation
1. Compute MAGI	AGI + certain foreign earned income exclusion amounts
2. Compute net investment income (NII)	Investment income minus allocable deductions
3. Compute excess MAGI	MAGI minus threshold ($200K single / $250K MFJ)
4. NIIT = 3.8% x lesser of NII or excess MAGI

What counts as net investment income:

Included (Subject to NIIT)	Excluded (Not Subject to NIIT)
Interest	Wages and salaries
Dividends (ordinary and qualified)	Self-employment income
Capital gains (short-term and long-term)	Active business income (material participation)
Rental income (generally)	Social Security benefits
Royalties	Tax-exempt interest
Passive business income (no material participation)	Distributions from qualified retirement plans
Annuity income (non-qualified)	IRA distributions
Gain on sale of passive investment	Gain on sale of active business (if materially participating)

NIIT thresholds (not indexed for inflation):

Filing Status	MAGI Threshold
Single	$200,000
Married filing jointly	$250,000
Married filing separately	$125,000
Head of household	$200,000
Estates and trusts	$15,450 (2025)

How can business owners reduce or avoid the NIIT?

Hypothetical example

Round numbers. A business owner (MFJ) has the following income:

Income Source	Amount	Subject to NIIT?
S-Corp business income (materially participates)	$400,000	No
Rental income (3 properties, passive)	$80,000	Yes
Dividends	$30,000	Yes
Capital gains (stock sales)	$90,000	Yes
Total MAGI	$600,000
Net investment income	$200,000

NIIT calculation:

Step	Amount
MAGI	$600,000
Threshold (MFJ)	$250,000
Excess MAGI	$350,000
Net investment income	$200,000
NIIT = 3.8% x lesser of ($200K NII or $350K excess)	3.8% x $200,000 = $7,600

Planning strategy 1: Real estate professional status If the owner (or spouse) qualifies as a real estate professional (750+ hours in real property trades/businesses, more than half of personal services), rental income is no longer automatically passive.

Item	Before RE Pro	After RE Pro
Rental income ($80,000)	Passive (NIIT applies)	Non-passive (NIIT doesn’t apply)
Net investment income	$200,000	$120,000
NIIT	$7,600	$4,560
NIIT savings		$3,040

Planning strategy 2: Grouping rental activities with active business Under Reg. 1.469-4, the owner can group rental activities with the active business as a single activity if they share an “appropriate economic unit.” If the rental properties are used in the active business (e.g., the business operates from one of the properties):

Item	Before Grouping	After Grouping
Rental income classification	Passive	Active (grouped with materially participated business)
Net investment income	$200,000	$120,000
NIIT savings		$3,040

Planning strategy 3: Timing capital gains Defer $90,000 of capital gains to next year (when income may be lower):

Item	This Year	Next Year (lower income)
Capital gains realized	$90,000	Deferred
Net investment income	$200,000	$110,000
NIIT	$7,600	$4,180
NIIT savings		$3,420 (if income below threshold next year, more)

Planning strategy 4: Installment sale (IRC 453) Instead of selling an investment property for $500,000 gain in one year, use an installment sale to spread the gain over 5 years:

Year	Gain Recognized	Additional NIIT
Year 1 (lump sum)	$500,000	$19,000
Year 1-5 (installment, $100K/year)	$100,000/year	$3,800/year
Total NIIT	$19,000	$19,000 (same total, but cash flow spread out)
NIIT savings if income drops below threshold in later years		Potentially significant

Planning strategy 5: Charitable giving to reduce MAGI Contribute $100,000 to a donor-advised fund:

Item	Before Contribution	After Contribution
MAGI	$600,000	$500,000
Excess MAGI	$350,000	$250,000
Net investment income	$200,000	$200,000
NIIT (3.8% x lesser of NII or excess)	$7,600	$7,600 (still limited to NII)

In this case, the charitable deduction does not reduce the NIIT because NII ($200K) is still less than excess MAGI ($250K). However, if the contribution were $200,000, reducing MAGI to $400,000 (excess $150,000), the NIIT would drop to 3.8% x $150,000 = $5,700 (savings of $1,900).

S-Corp sale and NIIT:

Scenario	NIIT Treatment
Sale of S-Corp stock (owner materially participated)	Gain is generally NOT subject to NIIT (non-passive)
Sale of S-Corp stock (passive owner, did not materially participate)	Gain IS subject to NIIT
Sale of rental property (passive)	Gain is subject to NIIT (including depreciation recapture)
Sale of active business assets (materially participated)	Gain is generally NOT subject to NIIT
Installment sale gain on passive investment	Each installment payment includes NIIT-subject gain

Trusts and estates NIIT:

Item	Details
Threshold	Only $15,450 (2025) of undistributed net investment income
Strategy	Distribute income to beneficiaries (shifts NIIT to their higher thresholds)
Example	Trust with $100,000 NII: $3,800 NIIT if retained; potentially $0 NIIT if distributed to beneficiary under $200K threshold

Illustrative numbers only, not a real client and not advice for your facts.

Related guides:

Want this checked against your own situation?

Start with a Diagnostic: a CPA licensed in the US and Canada reads your file and tells you in writing what's wrong and how to fix it, three to four business days after you finish the questions. The report is $250. If you hire us for any work after that, you get the $250 back as a discount on that work. Or send us your return or your letter and get a fixed price, free.

Start a Diagnostic →See prices

Get a fixed price, free

Get the next cross-border guide by email

One or two plain-English guides a week on US-Canada tax. No spam, unsubscribe anytime.

Cite this page

Yarik Yarosh, CPA. "Net Investment Income Tax (NIIT): The 3.8% Surtax on Investment Income and Planning Strategies for Business Owners." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-net-investment-income-tax-niit-3-8-percent-planning

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.