NIIT and AMT.
The two taxes that surprise high earners.

Section 1 · Net Investment Income Tax (NIIT)

A 3.8% surtax on investment income for higher earners. Introduced in 2010 to fund the Affordable Care Act. Codified at IRC Section 1411 verify×DON'T TRUST, VERIFYClaim: NIIT is a 3.8% surtax codified at IRC Section 1411.Verify at: IRS Topic 559: Net Investment Income Tax ↗IRS Topic 559 is the primary public-facing reference; underlying authority is IRC Section 1411..

What income it applies to:

• Capital gains (long-term and short-term, including Bitcoin gains)
• Dividends (qualified and ordinary)
• Interest income
• Rental income (most categories)
• Passive business income

What income it does NOT apply to:

• W-2 wages and self-employment income (these are subject to FICAFederal Insurance Contributions Act (FICA)The payroll tax that funds Social Security and Medicare, split between employee and employer.Full definition / SE tax instead)
• Distributions from qualified retirement plans (401k, IRAIndividual Retirement Account (IRA)A personal retirement savings account with tax advantages. Two main types: Traditional (tax now, pay later) and Roth (pay now, tax-free forever).Full definition)
• Active business income from a trade or business in which you materially participate

Section 2 · Strategies to reduce NIIT

NIIT cannot be avoided once gains are realized in a given year. The strategies below address NIIT through MAGI management, gain timing, and structure.

• Roth conversions in lower-income years. Future Roth withdrawals are not subject to NIIT and do not raise MAGI. Doing conversions in a gap year (early retirement, sabbatical, between jobs) reduces future NIIT exposure. See the Roth conversion calculator.
• Maximize traditional retirement-plan contributions. Pre-tax 401(k), 403(b), and Traditional IRA contributions reduce current MAGI directly. If reducing MAGI below the threshold is feasible, NIIT can be avoided entirely for the year.
• Installment sales. Spreading gain recognition across multiple tax years (using IRC Section 453) keeps each year's MAGI below the NIIT threshold where possible verify×DON'T TRUST, VERIFYClaim: Installment-sale treatment is available under IRC Section 453.Verify at: IRS Installment Sales ↗Installment-sale treatment applies to sales of certain property, not to publicly traded securities or cryptocurrency held for investment.. Note: not available for stock or cryptocurrency held for investment.
• Gifting appreciated assets to lower-income family members. If they are below the NIIT threshold, gains realized in their hands avoid the surtax (subject to gift-tax rules and the kiddie tax for children).
• Qualified Opportunity Zone investments. Defer gain recognition by reinvesting capital gains in a Qualified Opportunity Fund within 180 days. Hold the QOF for 10 years and the appreciation in the QOF itself is tax-free. See the tax-strategy page for the full mechanics.
• Charitable bunching via Donor-Advised Fund. Donating appreciated Bitcoin or stock to a DAFDonor-Advised Fund (DAF)A charitable account where you contribute, take an immediate tax deduction, and direct gifts to charities over time.Full definition avoids capital gains entirely on the donated amount and generates a deduction at fair market value (subject to AGIAdjusted Gross Income (AGI)Your total income minus certain deductions, used to calculate your tax bill.Full definition limits).

Section 3 · Alternative Minimum Tax (AMT)

A parallel tax system that runs alongside the regular tax system to ensure high earners pay at least a minimum amount. You pay whichever is higher: your regular tax or your AMT verify×DON'T TRUST, VERIFYClaim: AMT is calculated on Form 6251 and the taxpayer pays the higher of regular tax or AMT.Verify at: IRS Topic 556: AMT for Individuals ↗ · Form 6251 ↗Form 6251 is the official AMT calculation form. Topic 556 is the IRS public-facing summary..

How it works:

1. Start with regular taxable income.
2. Add back certain items that are deductible under regular tax but not AMT: SALTState and Local Tax (SALT)The federal deduction for state income taxes, property taxes, and local taxes, currently capped at $10,000 per year.Full definition, standard deductionstandard deductionA fixed dollar amount that reduces your taxable income without itemizing. Most people claim this instead of listing individual deductions.Full definition, ISOIncentive Stock Option (ISO)A right your employer gives you to buy company shares at a fixed price later. Cheaper taxes than other stock options if you hold long enough, but can trigger an unexpected extra tax called AMT.Full definition exercise spreads, certain depreciation.
3. Subtract the AMT exemption.
4. Apply AMT rate: 26% on amounts up to approximately $232,600 (2025), 28% above.

Who gets hit:

Under TCJATax Cuts and Jobs Act (TCJA)The big 2017 federal tax law. It nearly doubled the no-questions-asked tax deduction everyone gets, limited the deduction for state and local taxes to $10,000, and cut corporate and individual tax rates. Most of the personal tax cuts expire at the end of 2025 unless Congress extends them.Full definition, the AMT exemption was dramatically increased and the phase-out threshold raised, mostly eliminating AMT for middle-income earners. If TCJA expires (see /tcja-sunset/), the lower exemption returns and many more households become AMT-exposed.

Currently most at risk:

• High-income W-2 earners with large SALT deductions (in high-tax states)
• Executives exercising Incentive Stock Options (ISOs); the ISO spreadspreadThe difference between the market price of Bitcoin and what an exchange actually charges you, a hidden cost on top of stated transaction fees.Full definition is an AMT preference item
• Households with large tax-exempt interest from private-activity municipal bonds
• Taxpayers with large miscellaneous itemized deductions

Section 4 · The ISO + AMT trap

The most common AMT surprise hits Incentive Stock Option (ISO) holders.

Mitigation: exercise ISOs in the first quarter of the year, then watch the share price. If it drops, sell the shares before December 31 of the same year (a "disqualifying disposition") and the AMT preference is eliminated. The trade-off: a disqualifying disposition turns the gain into ordinary income rather than long-term capital gain. See /equity-compensation/ for the full mechanics.

Section 5 · How to check if either applies to you

For NIIT: Form 8960 is the calculation form. If your MAGI exceeds the threshold and you have any net investment income, you owe NIIT. Most tax software calculates it automatically.

For AMT: Form 6251 is the calculation form. Most tax software calculates AMT automatically and shows you whether you owe regular tax or AMT (whichever is higher).

Before a major event: run a projection.

• Selling Bitcoin worth more than your annual income? Project the NIIT and combined federal + state rate before deciding when and how much.
• Exercising ISOs? Run an AMT projection before exercising. Many companies offer ISO calculators; tax software does too.
• Doing a Roth conversionRoth conversionMoving money from a tax-deferred retirement account (where you'll owe tax later) into a Roth account (where everything grows and comes out tax-free). You pay regular income tax this year on the amount moved.Full definition that puts you above $200k single / $250k MFJ? The conversion itself does not trigger NIIT (retirement distributions are excluded), but it raises MAGI and could pull other investment income into NIIT range.

Use the tax estimator for NIIT scenarios. For ISO and AMT projections, consult a CPA before exercising. The cost of professional advice on a major equity-comp event is typically a fraction of the tax surprise it prevents.