The net investment income tax, or NIIT, is a 3.8% surtax on investment income
collected from higher-income individuals. It first took effect in 2013. After filing
your 2014 return, you may have been hit with this extra tax for two years, and you
may now be ready to get proactive by taking some steps to stop, or at least slow, the
bleeding for this year and beyond.
NIIT Basics. The NIIT can affect higher-income individuals who have investment income.
While the NIIT mainly hits folks who consistently have high income, it can also
strike anyone who has a big one-time shot of income or gain this year or any other
year. For example, if you sell some company stock for a big gain, get a big bonus, or
even sell a home for a big profit, you could be a victim. The types of income and
gain (net of related deductions) included in the definition of net investment income
and, therefore, exposed to the NIIT, include-
- Gains from selling investment assets (such as gains from stocks and securities
held in taxable brokerage firm accounts) and capital gain distributions from
- Real estate gains, including the taxable portion of a big gain from selling your
principal residence or a taxable gain from selling a vacation home or rental
- Dividends, taxable interest, and the taxable portion of annuity payments.
- Income and gains from passive business activities (meaning activities in which
you don't spend a significant amount of time) and gains from selling passive
partnership interests and S corporation stock (meaning you don't spend much time
in the partnership or S corporation business activity).
- Rents and royalties.
Are You Exposed? Thankfully, you are only exposed to the NIIT if your Modified
Adjusted Gross Income (MAGI) exceeds $200,000 if you are unmarried, $250,000 if you
are a married joint-filer, or $125,000 if you use married filing separate status.
However, these thresholds are not all that high, so many individuals will be exposed.
The amount that is actually hit with the NIIT is the lesser of: (1) net investment
income or (2) the amount by which your MAGI exceeds the applicable threshold. MAGI is
your "regular" Adjusted Gross Income (AGI) shown on the last line on page 1 of your
Form 1040 plus certain excluded foreign-source income net of certain deductions and
exclusions (most people are not affected by this add-back).
Planning Considerations. As we just explained, the NIIT hits the lesser of: (1) net
investment income or (2) the amount by which MAGI exceeds the applicable threshold.
Therefore, planning strategies must be aimed at the proper target to have the desired
effect of avoiding or minimizing your exposure to the tax.
- If your net investment income amount is less than your excess MAGI amount, your
exposure to the NIIT mainly depends on your net investment income. You should
focus first on strategies that reduce net investment income. Of course, some
strategies that reduce net investment income will also reduce MAGI. If so, that
cannot possibly hurt.
- If your excess MAGI amount is less than your net investment income amount, your
exposure to the tax mainly depends on your MAGI. You should focus first on
strategies that reduce MAGI. Of course, some strategies that reduce MAGI will
also reduce net investment income. If so, that cannot possibly hurt.
Perhaps the most obvious way to reduce exposure to the NIIT is to invest in
tax-exempt bonds via direct ownership or a mutual find. There are other ways, too.
Contact us to identify strategies that will work in your specific situation.
This publication is distributed with the understanding that the author, publisher and
distributor are not rendering legal, accounting or other professional advice or
opinions on specific facts or matters, and, accordingly, assume no liability
whatsoever in connection with its use. The information contained in this newsletter
was not intended or written to be used and cannot be used for the purpose of (1)
avoiding tax-related penalties prescribed by the Internal Revenue Code or (2)
promoting or marketing any tax-related matter addressed herein. © 2015