A couple sat across from me a few years back, both engineers at a Houston energy firm, both pulling solid six-figure salaries. They'd done everything right: maxed their 401(k)s, invested steadily, stayed out of debt. When we pulled up their tax return, they were floored. A line item they'd never noticed before had quietly added thousands of dollars to their bill. They looked at each other and one of them said, "What even is the Net Investment Income Tax?"
That question is more common than you'd think. And heading into 2026, it's one I'm getting almost every week.
Here's the short answer: the Net Investment Income Tax, or NIIT, is a 3.8% surtax on investment income (think capital gains, dividends, rental income, and interest) that kicks in once your Modified Adjusted Gross Income crosses $200,000 if you're single, or $250,000 if you're married filing jointly. If you're above those lines, that 3.8% gets layered on top of your regular income tax rate on the lesser of your net investment income or the amount your MAGI exceeds the threshold.
The good news: there are real, legal strategies to reduce or even eliminate this tax. Let's walk through them.
"Why Am I Suddenly Paying This? I Don't Feel Rich."
This is exactly what that engineering couple said. And honestly, their frustration was completely valid.
The NIIT thresholds, $200,000 for single filers and $250,000 for married filing jointly, have been frozen in place since the tax was enacted in 2010 through the Health Care and Education Reconciliation Act. They have never been adjusted for inflation. Not once. As Kiplinger reported in February 2025, that lack of inflation indexing pushes thousands more households over the threshold every year, even if their real purchasing power hasn't meaningfully increased.
This phenomenon has a name: bracket creep. It's the slow, quiet process by which inflation, not actual wealth gains, moves you into a higher tax category.
The numbers tell the story plainly. According to Ameriprise Financial (June 2023), the number of households hit by the NIIT has grown from 3.1 million to 7.3 million since the tax was first introduced. And IRS collections from this surtax rose from $16.5 billion in its first year to $59.8 billion in tax year 2021 (EveryCRSReport, June 2023). That's not because America suddenly got twice as wealthy. That's bracket creep doing its quiet, relentless work.
For dual-income households in Houston, specifically professionals in energy, healthcare, law, or tech, crossing $250,000 in combined household income is increasingly common. When you add investment income from a taxable brokerage account or a rental property into the mix, that 3.8% surtax can represent a meaningful and avoidable hit.
"What Can I Do to Lower My MAGI Before I Hit the Threshold?"
This is where professional planning can be valuable.
Your MAGI (Modified Adjusted Gross Income) is essentially your gross income minus certain "above-the-line" deductions, adjustments you can take even if you don't itemize. The goal is to legally reduce that number so you either fall below the NIIT threshold entirely, or minimize the gap above it.
Here are the most effective levers:
Maximize your 401(k) contributions. For 2026, the base 401(k) employee deferral limit is $24,500. If you are age 50 or older, the standard catch-up contribution is $8,000, bringing the total to $32,500. If you are age 60 through 63, you may be eligible for a higher catch-up of $11,250, bringing the total to $35,750, if your plan allows it. However, under SECURE 2.0, certain high earners may be required to make catch-up contributions on a Roth basis, which means those catch-up dollars would not reduce MAGI today. For a married couple both over 50, that's potentially $65,000 pulled off the top of their taxable income. That alone can push a couple from above the $250,000 threshold to below it.
Health Savings Account (HSA) contributions are another above-the-line deduction if you're on a high-deductible health plan. So are self-employed health insurance premiums, alimony paid under pre-2019 agreements, and student loan interest in certain situations. For 2026, the HSA contribution limits are $4,400 self-only and $8,750 family coverage, with the usual age-55+ catch-up available separately.
The strategy isn't complicated, but it does require intentionality. A lot of people leave these deductions on the table simply because nobody pointed them out.
"Should I Rethink How My Portfolio Is Invested?"
Absolutely, and this is one of my favorite conversations to have because the options are genuinely compelling.
Remember what the NIIT actually taxes: net investment income. Capital gains. Dividends. Interest. Rental income. If you can restructure your portfolio to generate less of these, or to shift them into tax-sheltered accounts, you reduce your exposure significantly.
Municipal bonds are one of the most powerful tools here. Interest from qualifying municipal bonds (debt issued by states, cities, and local governments) is generally exempt from federal income tax, and it does not count toward your net investment income for NIIT purposes. For a high-earning Houston professional in a combined federal bracket that might approach 40% or higher when you include the NIIT, a muni bond yielding 4% can be worth more after-tax than a corporate bond yielding 5.5% or 6%. The math shifts dramatically once you account for the surtax.
Tax-loss harvesting is another strategy I use with almost every taxable account client I have. It means intentionally selling investments that are sitting at a loss to offset capital gains elsewhere in your portfolio. Since the NIIT applies to net investment income, reducing your realized gains directly reduces your NIIT exposure dollar for dollar. Done consistently throughout the year, not just in December, tax-loss harvesting can make a real dent.
I had a client a few years back, a retired physician in the Houston area, who had a large taxable brokerage account built up over decades. Her investment income alone was pushing her $30,000 over the NIIT threshold. We restructured her fixed-income sleeve into a mix of short- and intermediate-term municipal bonds, and paired that with a disciplined tax-loss harvesting strategy in her equity holdings. The first year, we reduced her NIIT bill by over half. The strategy didn't require taking on more risk. It just required being strategic about where income was generated and what kind of income it was.
"Can a Roth 401(k) Help Me Here?"
This is one of the most underused strategies I talk about, and it trips people up because they confuse a Roth 401(k) with a Roth IRA.
Here's the critical difference: a Roth IRA has income limits. In 2026, if your income is too high, you can't contribute directly to a Roth IRA at all. A Roth 401(k), on the other hand, has absolutely no income limits. None. A household earning $500,000 can contribute to a Roth 401(k) just as easily as a household earning $80,000.
So why does this matter for NIIT planning?
Money inside a Roth account grows tax-free, and qualified withdrawals in retirement are tax-free as well. That means future gains, dividends, and growth inside a Roth 401(k) never become "net investment income" subject to the NIIT. You're effectively sheltering your future wealth accumulation from the surtax entirely.
And here's a bonus that many people still aren't aware of: under SECURE 2.0, Roth 401(k) accounts no longer have Required Minimum Distributions (RMDs). Previously, you had to start pulling money out at a certain age whether you wanted to or not, which could spike your income and potentially push you further over NIIT thresholds in retirement. That problem is now gone for Roth 401(k) holders.
For high earners who want to let their Roth accounts compound untouched for as long as possible, this is a genuinely significant change.
Now, the trade-off: Roth 401(k) contributions are made with after-tax dollars, which means they don't reduce your MAGI today. So if your immediate goal is to drop below the NIIT threshold this year, maxing a traditional pre-tax 401(k) is likely the better tool. The Roth 401(k) is the long game, protecting your future withdrawals from being taxed as investment income. Both strategies have a role, often at the same time.
"What About Trusts? My Financial Life Is More Complex Than Just a Brokerage Account."
Good question, and an important one if you have any trust structures in your estate plan.
The NIIT threshold for estates and trusts is dramatically lower than for individuals. For the 2026 tax year, that threshold sits at just $16,000 in adjusted gross income (Fidelity, April 2026), up slightly from $15,650 in 2025. That means trust-held investment income can hit the surtax almost immediately. If you have significant assets in a trust, this is a separate and urgent planning conversation, particularly around whether certain distributions or timing adjustments make sense.
One More Thing Worth Remembering
With the TCJA provisions now made permanent under the One Big Beautiful Bill Act signed in 2025, we have a rare gift in tax planning: long-term visibility. We know the rates. We know the brackets. We can actually model scenarios years out with a reasonable degree of confidence.
But the NIIT has always operated on its own terms. Its thresholds haven't moved in over a decade. As the Tax Foundation noted in March 2024, the top 50% of all taxpayers already account for 97% of all federal individual income taxes paid. The NIIT, hitting households that many wouldn't classify as ultra-wealthy, keeps quietly expanding that burden.
The strategies above aren't complicated. What they require is attention, timing, and a plan built around your actual numbers, not a generic checklist.
If you'd like to sit down and run through where you stand with the NIIT in 2026, I'm always happy to take a look. Sometimes one focused conversation changes the entire picture. Reach out and let's build that picture together.
Cetera Advisors LLC exclusively provides investment products and services through its representatives. Although Cetera does not provide tax or legal advice, or supervise tax, accounting or legal services, Cetera representatives may offer these services through their independent outside business. This information is not intended as tax or legal advice.