How the NIIT Hits LA Investors

The net investment income tax is a 3.8% surtax imposed by Section 1411 of the Internal Revenue Code. It applies to the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly). Those thresholds were set in 2013 and have never been adjusted for inflation.

Net investment income covers capital gains, dividends, interest, rental income, royalties, and passive business income. Wages, self-employment earnings, and retirement plan distributions are excluded. For LA residents working in entertainment, tech, or real estate, investment income from stock options, production profit participation, and rental properties commonly pushes them well above the MAGI threshold.

The California Difference

Most states with an income tax give some kind of break on long-term capital gains. California gives you nothing. The Franchise Tax Board taxes capital gains at the same rate as ordinary income, which means your gains flow straight into the state’s progressive brackets.

Here’s what that looks like for a single filer in LA with $250,000 in W-2 income selling stock worth $200,000 in long-term gains:

• Federal capital gains tax: $30,000 (15% rate)
• Net investment income tax: $7,600 (3.8% on the $200,000 gain)
• California state tax on the gain: approximately $18,600 (taxed as ordinary income at the 9.3% bracket and above)

Total tax on that $200,000 gain: roughly $56,200, or a 28.1% effective rate. A Florida resident with the same gain pays $37,600 — saving $18,600 on a single transaction.

Entertainment Industry and Stock Compensation

LA’s entertainment and tech professionals run into the NIIT through stock options and equity compensation more than people in most other cities. When you exercise ISOs and trigger AMT, or sell RSUs that have appreciated, the gains count as net investment income. Profit participation from film or TV deals is another common source.

One pattern we see regularly: someone exercises $500,000 in stock options in a single year, pushing their MAGI past the threshold by hundreds of thousands. The NIIT alone on that transaction can be $19,000, and California’s state tax adds another $50,000+. Spreading exercises across multiple tax years, when possible, is one of the more effective planning moves available.

Reducing Your NIIT Liability in California

Tax-loss harvesting works dollar-for-dollar against net investment income. If you’re sitting on losing positions, selling them before year-end offsets gains and directly reduces the amount subject to the 3.8% surtax. In California, where the state also taxes gains as ordinary income, each dollar of harvested loss saves you up to $0.371 in combined federal and state tax.

Charitable giving through appreciated stock eliminates the capital gain entirely. You get a fair-market-value deduction, the charity sells without paying tax, and neither you nor the IRS sees a gain. For LA residents in the top brackets, donating appreciated shares instead of cash saves the federal capital gains tax, the NIIT, and the California income tax on the gain.

Installment sales spread the gain recognition over multiple years, which can keep your MAGI below the NIIT threshold in each year. This is especially useful when selling a business or large real estate holding.

And there is always the option people don’t want to hear about: moving. California taxes residents on worldwide income, but once you establish domicile in a no-income-tax state, your investment income leaves the 13.3% bracket behind. The NIIT still applies, but you drop about 10 percentage points off your effective rate on gains.