global Tax Reducing the 3.8% Net Investment Income Tax in 2025: 4 Key Strategies February 03, 2025 Are your investments subject to the 3.8% Net Investment Income Tax in 2025, and will this change under the new administration? Here's what you need to know! Investing can yield impressive returns, but it often comes with a visit from Uncle Sam. One tax to keep on your radar is the Net Investment Income Tax (NIIT), which imposes a 3.8% levy on your investment earnings over certain thresholds. Here's what you need to know about this tax in 2025. What Is the NIIT? The NIIT is a 3.8% tax that applies to the lesser of: Your net investment income (NII), or The amount by which your modified adjusted gross income (MAGI) exceeds IRS thresholds based on your filing status. Who Pays the NIIT? The NIIT applies to: Individuals: U.S. citizens and resident aliens whose MAGI exceeds IRS thresholds. For the 2025 tax year, the thresholds are $250,000 for individuals Married Filing Jointly, $125,000 for Married Filing Separately, and $200,000 for Single or Head of Household. Non-resident aliens are generally exempt unless filing jointly with a U.S. spouse. Estates and Trusts: Those with both undistributed NII and AGI exceeding $15,650 in 2025. However, certain trusts, like grantor trusts and perpetual care trusts, are exempt. What Counts as Net Investment Income? NII includes: InterestDividendsCapital gainsIncome from annuitiesRental and royalty incomePassive business income Keep in mind that NII does not include: wages, self-employment income, non-passive business income, Social Security benefits, tax-exempt interest or distributions from qualified retirement plans. What Deductions Are Allowed for Net Investment Income? Taxpayers are limited in utilizing deductions towards NII. The deductions allowed are for expenses related to investment income including investment interest expense, state and local income taxes related to investment income, and certain miscellaneous deductions. Taxpayers who itemize are not allowed to deduct certain deductions like medical expenses, personal residence mortgage interest, or charitable contributions for purposes of NII. To determine your NIIT, calculate your modified adjusted gross income (MAGI) and net investment income (NII), then apply the 3.8% tax to the smaller of the two figures exceeding IRS thresholds. What’s new in 2025? Looking ahead, several developments could influence the NIIT: Expiration of Tax Cuts and Jobs Act (TCJA) Provisions: Many individual tax provisions from the TCJA are set to expire at the end of 2025. While the TCJA retained the NIIT, its expiration could lead to broader tax changes that might indirectly affect investment income taxation, such as expanded deductibility of state and local taxes and investment fees Potential Policy Changes: Expanding the NIIT to include non-passive business income and increasing the NIIT rate has been viewed as a potential revenue raiser. Minimization strategies for 2025 Here are practical ways to manage your exposure to the NIIT: Lower Your MAGI: Contribute to tax-advantaged accounts like a 401(k), 403(b), SEP IRA, or health savings account (HSA) to reduce your taxable income. Income from these qualified plans is tax-deferred until withdrawals are made from the accounts. It can also help to spread income from asset sales over multiple years using installment sales. Reduce Your NII: Be sure you are deducting all available expenses including margin interest paid and rental property expenses. You can also consider selling investments at a loss to offset gains, commonly known as “loss harvesting”. Defer Capital Gains: Utilize strategies like Section 1031 like-kind exchanges for investment properties or Section 1035 exchanges for insurance and annuity policies. Donate Appreciated Assets: While charitable donations are not deductible for NIIT, as is the case with the regular income tax, one NIIT reduction strategy is to donate appreciated securities directly to qualified charities to avoid paying capital gains tax before donating. Investing wisely includes planning for taxes. By understanding the NIIT and its implications, you can better manage your tax obligations while maximizing your returns. We can help to ensure you're calculating and filing the NIIT correctly.
