The Net Investment Income Tax (NIIT) is one of the most frustrating “stealth taxes” that many high-income earners and investors face. As a tax accountant with 20 years of experience, I’ve seen firsthand how the Net Investment Income Tax (NIIT) can sneak up on high-income earners and investors. The NIIT was introduced as a way to make wealthier individuals contribute to Social Security by imposing a 3.8% tax on net passive income once their adjusted gross income (AGI)surpasses a certain threshold.

The problem? It’s a “below-the-line” tax, meaning it kicks in after most tax credits are applied, making it much harder to offset. For instance, if you pay taxes on foreign investments, you might assume the Foreign Tax Credit (FTC) will protect you from double taxation—but the NIIT comes in after that, adding an extra layer of taxation that you can’t reduce.

For those facing this tax, traditional tax planning only goes so far. The real solution is restructuring how you earn income, and one of the best ways to do that is by forming a corporation. Here’s why this strategy works and how it can help you keep more of your money.

Who is Affected by NIIT?

The NIIT applies to high-income earners, but it can hit anyone who has a year with significant investment income. You’ll be subject to the 3.8% tax on your net passive income if your AGI surpasses these thresholds:

• $200,000 for single filers
• $250,000 for married couples filing jointly
• $125,000 for married filing separately

Since the tax applies to passive income, it affects:

• Interest, dividends, and rental income
• Capital gains from selling stocks or real estate
• Profits from passive business investments

Even taxpayers who aren’t normally in the high-income bracket can get hit by this tax in a year with large capital gains—for example, if you sell stock options, real estate, or a business. That’s when the NIIT suddenly becomes a very expensive surprise.

Why NIIT is Becoming a Bigger Problem Over Time

One of the biggest flaws of the NIIT is that it’s not indexed to inflation.

This means that more and more taxpayers get caught in its net every year as wages and investment gains rise. We’ve seen this same issue before—like with the passive activity loss limitation on rental properties. That rule capped deductible losses at $100,000 AGI when it was introduced in the 1980s, but back then, only the wealthiest Americans made that much. Today, a $100,000 salary is middle-class, yet the limit has never increased.

The NIIT follows the same pattern—slowly creeping into affecting more taxpayers over time. What started as a tax aimed at the ultra-wealthy is now hitting everyday investors.

The Best Way to Avoid NIIT: Forming a Corporation

If you’re regularly paying NIIT—or you’re at risk of triggering it in a high-income year—the best way to legallyminimize your exposure is to restructure how your income is reported. One of the most effective strategies? Forming a corporation.

Why a Corporation Works

The NIIT only applies to individuals, estates, and trusts—not corporations. By shifting your investment or business income into a C-corporation, you can eliminate your exposure to NIIT entirely.

Here’s how it works:

1. Control Over Your Salary
   • If you own a business, you can pay yourself a reasonable salary while keeping the rest of your profits in the corporation.
   • Since wages are NOT subject to NIIT, this can significantly lower your taxable passive income.
2. Reinvesting Profits in the Business
   • Instead of taking large taxable dividends or capital gains distributions, you can retain earnings within the corporation and reinvest.
   • Corporate tax rates (currently 21%) are often lower than individual rates, depending on your total income.
3. Larger Retirement Contributions
   • Corporations allow for higher pre-tax retirement contributions, which reduce AGI and help keep income below the NIIT threshold.
4. More Flexible Tax Credits
   • Unlike individuals, corporations can use all eligible tax credits to offset taxes without limitation—which is not the case for NIIT on personal returns.

Who Benefits Most from a Corporate Structure?

• High-income investors who earn significant dividends, interest, or capital gains
• Business owners who can control how they pay themselves
• Real estate investors who want to protect rental income from NIIT
• Anyone anticipating a large capital gain from selling an asset

This strategy isn’t just for the ultra-rich—it’s a tool that business owners and investors can use to take control of their tax situation.

How NIIT Affects Other Taxes (and What Most People Overlook)

One mistake I see people make all the time is underestimating the true cost of capital gains taxes. Many investors assume that long-term capital gains tax rates are their only concern:

• 0% for AGI up to $44,625 (single) / $89,250 (married)
• 15% for most taxpayers
• 20% for AGI over $492,300 (single) / $553,850 (married)

But once NIIT applies, your actual tax burden increases by 3.8%—which can add up fast.

NIIT vs. Medicare Surtax: What’s the Difference?

Many people also confuse NIIT with Medicare surtaxes, but they are separate taxes:

• NIIT (3.8%) applies only to passive income over the AGI threshold.
• Medicare surtax (0.9%) applies to wages and self-employment income over $200K/$250K.

For business owners, a smart tax strategy can reduce exposure to both taxes—by using S-corp distributions to lower taxable wages and a C-corp structure to reinvest earnings tax-efficiently.

Forming a Corporation is the Smartest Way to Avoid NIIT

The NIIT is a growing problem, especially since it isn’t indexed to inflation and can’t be offset by most tax credits. As more taxpayers get pulled into paying this tax, strategic planning is essential.

For those with significant investment income, the best solution is forming a corporation. By shifting income into a corporate structure, you can bypass NIIT entirely while also leveraging business deductions, optimizing retirement contributions, and applying tax credits more effectively.

If you’re dealing with NIIT and looking for a smarter way to manage your tax burden, now is the time to consider restructuring your income strategy. A combination of corporate structuring and AI-powered tax planning can keep more money in your pocket- rather than handing it over to the IRS. Schedule a consultation today to find out more about how you may benefit.