Can I Avoid the Net Investment Income Tax?

High-income taxpayers pay an additional 3.8% Net Investment Income Tax (NIIT) on investment income — including dividends, interest, capital gains, and passive rental income — above $200,000 (single) or $250,000 (married filing jointly). To minimize NIIT, consider strategies like investing in tax-exempt municipal bonds (interest is excluded from NIIT), holding investments in tax-deferred accounts like IRAs or 401(k)s, converting passive business income to active income by materially participating in the business, or timing the recognition of capital gains in lower-income years. The NIIT stacks on top of regular capital gains rates, making tax planning increasingly important at higher income levels. Charitable remainder trusts can also help defer or avoid NIIT on appreciated asset sales.