Some taxes are straightforward. Many are not.

In the spirit of the latter, I’m debuting a new segment called Sneaky Taxes where I’ll detail the trickiest rules in the tax code.

If the IRS is hellbent on making taxes confusing and endlessly circumstantial, I may as well devote a series to addressing some of these situations that can cost you thousands in avoidable tax payments.

To be clear, it’s not about avoiding taxes you should be paying.

It’s about keeping an eye on things throughout the year so you aren’t blindsided by sneaky tax bills in April of the following year.

Year-round reviews are critical especially for business owners.

The Net Investment Income Tax (NIIT) is a classic case of how taking your eye off the ball can cost you at least a few thousand bucks.

Your AGI is $200,000 as a single filer or it’s $250,000 as married filing jointly?

Congratulations… your gift is a 3.8% surtax.

Hey, IRS… SIR…. C’mon!

The net investment income tax is one of those sneaky taxes and, like many tax laws, it’s not straightforward.

Brackets

Tax brackets are trickyyyy, and I firmly believe an advisor or accountant can never oversimplify taxes.

Before we dive into the NIIT Tax, for those of you who don’t have a handle on effective vs marginal tax rates, a quick example:

Let’s use a fictional example to understand marginal vs. effective rates:

Earned Income at $200,000

Marginal Tax Rate -> the HIGHEST rate you pay = 20%

Effective Tax Rate -> the actual tax dollars paid divided by income = $25,000 / $200,000 = 12.5%

Okay back to why we’re here: the Net Investment Income Tax.

Why NIIT?

The Net Investment Income Tax (NIIT), created as part of the Affordable Care Act (ACA) going into effect in 2013, was enacted to support healthcare initiatives from the ACA, notably Medicare.

Who’s in play for NIIT?

If your income is $200,000 and above as a single filer or $250,000 and above as married filing jointly, then you are subject to NIIT. It’s important to note that these thresholds are NOT inflation-adjusted unfortunately.

If you have a level of net investment income, defined as dividends, capital gains from the sale of stocks or real estate, interest, passive[i] rental or business income, you are especially vulnerable to the NII tax.

The NET portion of the net investment income considers fees related to managing accounts with investment income.[ii]

NIIT Calculation

It applies a 3.8% tax on the lesser of:

Your net investment income, or
The amount your modified adjusted gross income (MAGI) exceeds certain thresholds ($200K for single filers, $250K for married filing jointly)

Example 1

You are married filing jointly and your household income is $350,000.

Of that $350k, $75,000 is classified as net investment income.

You pay the lesser of:

MAGI is $100,000 over the $250k threshold so $100,000 x 3.8% = $3,800
3.8% of net investment income of $75,000 = $2,850

Example 2

You are a single filer and let’s say your MAGI is $300,000.

Of that $300k, $150,000 are made up of gains from the sale of stock in your brokerage account.

You pay the lesser of:

MAGI is $100,000 over the $200k threshold so $100,000 x 3.8% = $3,800

3.8% of net investment income of $150,000 = $5,700

Lowering MAGI as a Business Owner

1. Pre-tax retirement plan contributions

Traditional 401(k), SEP & SIMPLE IRA contributions and cash balance plans. For solo business owners, Solo 401(k) contributions can significantly bring down MAGI below the NIIT threshold.

Solo 401(k) plans allow for up to $70k in combined employee/employer contributions with an additional a) $7,500 for those age 50 and older and b) $11,250 for those 60 and older

2. Business Expenses

All ordinary and necessary expenses including rent, software, advertising, 50% of meals, travel, phone, internet, office supplies, etc.

3. Self-Employed Health Insurance Deductions

You can deduct 100% of health, dental, and long-term care premiums for yourself, your spouse, and dependents.

For business owners with employees, group health plans are also deductible as a business expense.

4. Depreciation (Including Bonus and Section 179 Expensing)

Certain business purchases—like equipment, software, or vehicles—can be written off faster using depreciation. Bonus depreciation allows for immediate deduction of 60% of the cost of qualifying assets in 2025.

Section 179 expensing lets you deduct up to $1.22 million (2025 limit, phased out after $3.05 million in purchases) of eligible property. These strategies reduce taxable business income and, in turn, MAGI subject to NIIT.

5. Health Savings Account (HSA) Contributions

If you have a High-Deductible Health Plan (HDHP), you can deduct up to $8,550 (family) or $4,300 (individual) in 2025 with an additional $1,000 catch-up contribution available for those age 55 and older.

Don’t let the NIIT creep up on you like it does for so many nervous tax filers who hope and pray for no tax surprises.

3.8% on top of your state and federal income tax liability can add up.

Proactive tax planning doesn’t just save you money—it gives you control.

The more you keep, the more flexibility you have to reinvest in your business, take risks, or simply breathe easier at tax time.

[i] Passive meaning you are not materially participating in the business or real estate investment.

[ii] The most notable would be interest on margin loans on taxable investment accounts. Other offsetting expenses include advisor fees, broker fees, tax preparation fees, rental property expenses passive business expenses, and state & local taxes attributable to investment income.

Two Palms Planning LLC, doing business as Two Palms Financial, is a registered investment adviser registered with the State of California. Registration does not imply a certain level of skill or training. The content of this publication is for informational or educational purposes only. This content is not intended as individualized investment advice, or as tax, accounting, or legal advice. The information contained herein is based on current tax laws and regulations, which are subject to change. Although we gather information from sources that we deem to be reliable, we cannot guarantee the accuracy, timeliness, or completeness of any information prepared by any unaffiliated third-party. This information should not be relied upon as the sole factor in an investment-making decision. Readers are encouraged to consult with professional financial, accounting, tax, or legal advisers to address their specific needs and circumstances.

Sneaky Taxes: The Net Investment Income Tax