The Net Investment Income Tax (NIIT) is a 3.8% surtax that applies to individuals, estates, and trusts with income above certain thresholds. For individual taxpayers in the USA in 2025, understanding the difference between passive income and non-passive income is critical to avoid unexpected tax bills and optimize financial planning.
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📌 Who Pays the NIIT in 2025?
The NIIT applies if your Modified Adjusted Gross Income (MAGI) exceeds these thresholds:
- $200,000 – Single or Head of Household
- $250,000 – Married Filing Jointly
- $125,000 – Married Filing Separately
Once above these thresholds, you may owe NIIT on the lesser of your net investment income or the amount your MAGI exceeds the threshold.
💰 What Counts as Passive Income?
Passive income includes investment and rental sources where you do not materially participate. Examples:
- Interest, dividends, and annuities
- Capital gains (short-term and long-term)
- Rental real estate activities (unless qualifying as a real estate professional)
- Royalties
- Business income from activities in which you do not materially participate
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💼 What Counts as Non-Passive Income?
Non-passive income is generally from active participation in a trade, business, or employment. Examples include:
- Wages, salaries, and bonuses
- Self-employment income where you materially participate
- Active partnership or S corporation income (with material participation)
- Unemployment compensation
- Social Security benefits
Non-passive income is not subject to NIIT, though it may increase your MAGI, thereby exposing more of your investment income to NIIT.
⚖️ Common NIIT FAQs for 2025
- Q: Do capital gains from selling my home count?
A: Yes, but the IRS exclusion of up to $250,000 ($500,000 for married couples) may reduce taxable gains. - Q: Are IRA and 401(k) distributions subject to NIIT?
A: No, retirement plan distributions are excluded. However, they can push MAGI above thresholds. - Q: Do municipal bond interest earnings count?
A: No, tax-exempt interest is not subject to NIIT. - Q: If I qualify as a real estate professional, do rental earnings count?
A: Generally no, if you materially participate in the rental activity.
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📊 Tax Planning Tips for NIIT in 2025
- Harvest investment losses to offset taxable gains.
- Consider shifting income to tax-exempt bonds.
- Maximize retirement plan contributions to reduce MAGI.
- Reevaluate rental real estate activities for material participation qualification.
- Time capital gains strategically (e.g., spreading sales over multiple years).
✅ Final Takeaway
For individual taxpayers in the USA in 2025, the NIIT continues to be a critical tax planning factor. Recognizing what qualifies as passive vs. non-passive income helps you manage exposure to the 3.8% surtax, while aligning investment and income strategies with IRS regulations. Staying proactive now can reduce your tax bill at filing time.
