NUA and the 3.8% Net Investment Income Tax: How NIIT Changes the Breakeven

Short answer: for high earners, NIIT raises the effective federal rate on NUA appreciation from 20% to 23.8%. That's still a 13-point spread versus the 37% top ordinary income rate — NUA wins by a large margin. But NIIT changes when you sell and how much you sell at once, and ignoring it can mean a large, avoidable tax bill in your sale year.

How NIIT applies to NUA — the two-layer structure

The NUA distribution has two components, and they receive completely different NIIT treatment:

The NIIT is separate from the capital gains tax — it's additive. So if your MAGI places you in the 20% long-term capital gains bracket and over the NIIT threshold, the effective rate on your NUA gain is 20% + 3.8% = 23.8%.

The NIIT threshold: not indexed for inflation

The NIIT threshold has never been adjusted for inflation. It was set at $200,000 / $250,000 when the ACA passed in 2010 and has remained there through 2026.¹ In real purchasing-power terms, the 2026 threshold is substantially lower than the 2013 equivalent. If you receive a pension, Social Security, and any investment income in retirement, you may already be above $250,000 MFJ before you sell any NUA shares.

Practical implication: most NUA candidates — employees with $500K+ of highly-appreciated employer stock — will be above the NIIT threshold in their sale year. Build it into the model from the start.

Effective federal rates on NUA appreciation (2026)

2026 LTCG thresholds: 0% up to $98,900 MFJ; 15% up to $613,700 MFJ; 20% above $613,700 MFJ. Source: IRS Rev. Proc. 2025-28. NIIT threshold unchanged at $250,000 MFJ since 2013. Note: NIIT applies to the lesser of net investment income or MAGI excess over threshold; partial application is possible near the threshold.

The relevant comparison for most NUA candidates: 23.8% on the NUA appreciation versus 37% on an equivalent ordinary-income IRA withdrawal — still a 13.2-point spread in NUA's favor, worth hundreds of thousands of dollars on large positions.

Worked example: Julia

Julia, 65, is retiring from a large industrial company after 32 years. Her 401(k) holds $2M of company stock; her cost basis (what the plan paid for the shares over her career) is $160,000 — a 12.5:1 appreciation ratio. Her other retirement income in 2026: $140,000 pension + $60,000 Social Security (combined, at a combined income level that results in $51,000 taxable SS) = approximately $191,000 MAGI before any NUA-related income. She files MFJ.

NUA path — with NIIT

• Distribution year (2026): $160K cost basis distributed in-kind with the stock. Ordinary income taxed at 24% federal bracket = $38,400. No NIIT on this portion.
• Sale year (2027): She sells the $1.84M of NUA shares. Her MAGI from other income is $191K; the $1.84M gain pushes MAGI to approximately $2.03M — well into the 20% LTCG bracket and far above the $250K NIIT threshold. Federal rate on the gain: 20% + 3.8% = 23.8% = $437,920.
• Total federal tax on position: $476,320

Rollover path — IRA over 10 years

• Roll $2M to IRA in 2026 — no immediate tax.
• Withdraw $200K/year for 10 years. Each $200K adds to existing $191K income, pushing the marginal withdrawal into the 32–37% federal brackets. Blended effective rate on the $2M: approximately 34–37%.
• At 35% blended federal rate: $700,000 in total federal tax. No NIIT (ordinary income is not net investment income).
• Plus: RMDs begin at age 73/75 under SECURE 2.0, forcing large mandatory withdrawals regardless of need — potentially accelerating the high-bracket withdrawals.

How the NIIT calculation actually works (it's not always 3.8% on the full gain)

The NIIT is calculated on IRS Form 8960 as 3.8% of the lesser of:

1. Your net investment income (NII) for the year, OR
2. Your MAGI minus the applicable threshold ($250,000 MFJ)

This means the NIIT can apply to less than your full NUA gain if your MAGI doesn't greatly exceed the threshold. Example: If Julia's non-NUA MAGI is $270,000 (rather than $191,000) and she sells $1.84M of NUA gain, her MAGI excess over threshold is $270K + $1.84M − $250K = $1.86M — which is less than her $1.84M NII. Result: NIIT applies to the full $1.84M gain.

But if she had very little other income and her total MAGI with the NUA sale was only $380,000 MFJ, the MAGI excess over threshold is $130K while the NII is $1.84M — so NIIT applies only to $130K. She'd owe 3.8% × $130K = $4,940 in NIIT, not 3.8% × $1.84M = $69,920. This is where tranche selling creates real value.

Tranche selling: the most accessible NIIT planning tool

After the NUA distribution, the clock doesn't run — you don't have to sell the stock immediately. The NUA appreciation retains LTCG treatment permanently (as long as the shares are held at least one year from distribution date). Spreading sales over multiple years limits how much gain hits any single year's MAGI, which can:

• Keep MAGI closer to the $250K threshold, reducing the MAGI excess and limiting NIIT to a smaller amount
• Keep the LTCG amount in the 15% bracket rather than the 20% bracket (threshold: $613,700 MFJ in 2026)
• Avoid IRMAA cliffs — Medicare Part B and Part D surcharges are set based on MAGI from 2 years prior; a single year of high gain can trigger elevated premiums for 2 years

Charitable strategies: bypass NIIT entirely

Donating appreciated NUA shares directly to charity, a donor-advised fund (DAF), or a charitable remainder trust (CRT) eliminates both the capital gains tax and the NIIT on the donated shares. You don't recognize a gain — so there's no LTCG and no NIIT. You receive a charitable deduction for the fair market value (subject to AGI limits).

• Direct donation: Transfer shares in-kind to a 501(c)(3). No gain recognized, full FMV deduction.
• DAF (donor-advised fund): Contribute NUA shares, get immediate deduction, grant to charities over time. Eliminates NIIT permanently on contributed shares.
• CRT (charitable remainder trust): Transfer shares to a CRT; the trust sells them tax-free and pays you an income stream over your lifetime. NIIT is spread over distributions, often well below the $250K threshold. Substantial estate and income tax planning flexibility.

For a retiree who plans to give charitably anyway, donating NUA shares — rather than cash — directly eliminates the 23.8% combined tax on those shares. This is one of the highest-leverage planning moves available after an NUA distribution.

IRMAA: the hidden NIIT-adjacent cost

Medicare Part B and Part D premiums are set based on your MAGI from 2 years prior ("IRMAA lookback"). In 2026, the base Medicare Part B premium is $202.90/month. At the top IRMAA tier (MAGI above $750,000 MFJ), the monthly Part B premium reaches $689.90/person — a $487.00 surcharge per person per month, or $5,844/year per person above the base.³

If Julia sells her full $1.84M NUA position in 2027, her 2027 MAGI will push well above $750K. Her Medicare premiums in 2029 will spike to top-tier IRMAA rates for both her and her spouse — roughly $23,400 in additional annual Medicare cost for two people for two years totaling ~$46,800, simply from the timing of the NUA sale.

A multi-year tranche sale keeps annual MAGI lower, potentially avoiding the top IRMAA tiers and saving $20,000–$40,000 in Medicare premiums that an all-at-once sale would trigger.

Does NIIT change whether NUA makes sense at all?

Rarely. The spread between 23.8% (NUA + NIIT) and 37% (rollover at top ordinary rate) remains 13.2 percentage points — enough to save six figures on positions over $500K with high appreciation ratios. NIIT is a modifier, not a reversal. The cases where NIIT might tip the decision toward rollover are narrow:

• Low appreciation ratio (2:1 or less) where the absolute dollar spread is thin — adding NIIT shrinks an already marginal NUA advantage
• Retiree in a low ordinary income bracket where rollover withdrawals stay at 12–22% (not typical for the target NUA audience)
• State tax context where no LTCG preference AND NIIT applies (CA, NJ, NY): combined state + federal effective rate on NUA gain can approach 35%, narrowing the spread further

For the typical NUA candidate — long-tenure employee, 8:1 or higher appreciation ratio, moderate-to-high retirement income — NIIT is a planning variable, not a dealbreaker.

Sources

1. IRS: Net Investment Income Tax. IRC § 1411; 3.8% applies to net investment income (including LTCG) above $200,000 single / $250,000 MFJ. Threshold not indexed for inflation. Wages and retirement plan distributions excluded from NII definition. 2026 threshold unchanged.
2. IRS Topic No. 559 — Net Investment Income Tax. Covers NII definition, Form 8960 calculation, and threshold amounts. Confirms ordinary distributions from qualified retirement plans are not NII.
3. CMS: 2026 Medicare Parts A & B Premiums and Deductibles. Base Part B premium $202.90/month; top IRMAA tier (MAGI above $750,000 MFJ) $689.90/month/person; surcharge $487.00/month/person. IRMAA lookback is 2 years prior MAGI (2026 IRMAA based on 2024 MAGI; 2028 IRMAA based on 2026 MAGI). Verified April 2026.
4. IRC § 1411 — Imposition of Tax (NIIT). Statutory authority for the 3.8% surtax; NII definition at § 1411(c); MAGI threshold at § 1411(b).
5. IRC § 402(e)(4) — NUA exclusion from gross income. Employer stock appreciation excluded at distribution; treated as LTCG at sale. This appreciation is net investment income under § 1411 when realized.
6. Tax Foundation: 2026 Federal Tax Brackets. LTCG 0% threshold $98,900 MFJ; 15% threshold $98,900–$613,700 MFJ; 20% above $613,700 MFJ. Source: IRS Rev. Proc. 2025-28.

NIIT rules governed by IRC § 1411. NUA rules governed by IRC § 402(e)(4). Tax values verified against 2026 IRS guidance; NIIT threshold confirmed unchanged from ACA enactment. IRMAA tiers from 2026 CMS guidance. Content is for informational purposes only. Values verified April 2026.