elling a highly appreciated investment late in the year could trigger an additional tax cost: the 3.8% net investment income tax (NIIT). If you're considering a significant transaction before January 1, first estimate the potential tax impact and evaluate planning opportunities.
How the NIIT works
You may be subject to the NIIT if you invest outside of tax-deferred accounts and your modified adjusted gross income (MAGI) exceeds the applicable threshold: $200,000 for single filers and heads of household, $250,000 for married couples filing jointly or $125,000 for married taxpayers filing separately. These thresholds aren't indexed for inflation, so more taxpayers are subject to the NIIT now than when the tax first went into effect.
The NIIT equals 3.8% of the lesser of your net investment income or the amount by which your MAGI exceeds the applicable threshold.
Net investment income generally includes taxable interest, dividends, capital gains, rents, royalties, nonqualified annuities and income from passive business activities. Wages, Social Security benefits, tax-exempt interest and income from nonpassive business activities (other than certain financial trading businesses) generally aren't included.
Distributions from IRAs and qualified retirement plans also aren't net investment income. But taxable distributions can increase MAGI and, therefore, increase the amount of investment income exposed to the tax.
Watch for a year-end spike
A one-time transaction, such as selling appreciated stock or investment real estate, can push MAGI above the NIIT threshold. Before closing a large sale in 2026, consider whether changing the timing or structure could reduce your NIIT exposure.
For example, you can postpone the stock sale until 2027 or structure the real estate transaction as an installment sale to spread the gain over multiple tax years. If you're at NIIT risk and you've already realized gains in 2026, harvesting capital losses before year end may offset those gains and reduce both MAGI and net investment income. (Keep the wash-sale rules in mind when selling securities at a loss.)
Investors should also account for dividends, mutual fund capital gain distributions and other investment income expected before year end. These amounts can increase both MAGI and net investment income, potentially increasing your NIIT exposure.
Reducing MAGI can also help. Depending on your circumstances and eligibility, maximizing pretax contributions to an employer retirement plan, making deductible traditional IRA contributions or contributing to a Health Savings Account may lower MAGI.
If you have flexibility over the timing of other taxable income, deferring it until 2027 may also help reduce your 2026 MAGI. Remember that itemized deductions don't reduce MAGI and, therefore, won't reduce NIIT exposure.
Project and plan
NIIT planning shouldn't drive an investment decision. Current market conditions, cash flow needs and your broader financial goals are important. But if a large transaction is on the horizon, modeling the tax consequences before acting is a good idea. We can help project your 2026 MAGI and NIIT exposure and plan accordingly.