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All reviews are prepared by our staff. Opinions expressed are solely those of the reviewer and have not been reviewed or approved by any advertiser. The information, including any rates, terms and fees associated with financial products, presented in the review is accurate as of the date of publication. SHARE: undrey/Getty Images March 23, 2022 Bankrate reporter Georgina Tzanetos covers investing and retirement. Brian Beers is the managing editor for the Wealth team at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money. Bankrate logo The Bankrate promise
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You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. If your investments recently made any money, you might owe something called the net investment income tax (NIIT) on your profits. Although many investors are not likely to get hit with this bill, it’s important to know whether or not you’re subject to paying NIIT to avoid any surprises when it . What is the net investment income tax
NIIT is a tax on net investment income. Those who are subject to the tax will pay 3.8 percent on the lesser of the following: their net investment income or the amount by which their (MAGI) extends beyond their specific income threshold. Net investment income typically includes the following: interest dividends capital gains income from rental properties royalties non-qualified annuities (the taxable portion of the investments) passive investment income business income from financial trading (this is earned income if it is from your job) , and thus subject to different tax laws. Non-qualified annuities, such as those that are personally owned (as one would personally own a brokerage account, for example) fall under the umbrella of net investment income. These are the broader examples of what falls under net investment income – estates and trusts, for example, can also be subject to the tax depending on certain rules and how they are titled. The details exactly what qualifies as net investment income and what does not. It’s important to note that “net” means once losses are already deducted from the investment. This also does not include your investment principal, or let’s say, the . There are several other types of income the IRS states do not count toward the NIIT: wages unemployment compensation alimony payments most self-employment income Social Security benefits qualified plan withdrawals (401(k), IRA etc.) money received from traditional defined pensions or retirement plan annuities life insurance proceeds proceeds from state/local government or other tax-exempt organizations active business investment income Who is subject to paying NIIT
Not everyone will need to pay the NIIT, and only those who fall above certain income thresholds will be subject to it. The IRS statutory income thresholds are as follows: Married filing jointly — $250,000 Married filing separately — $125,000 Single or head of household — $200,000 Qualifying widow(er) with a child — $250,000 Those who exceed the income thresholds based on their filing status have to determine whether their net investment income or the amount by which their MAGI exceeds it is larger. The lower number of the two is the one that will be subject to the 3.8 percent additional tax. How NIIT is calculated
Here’s an example of how to calculate NIIT. Kelly and John are married, file jointly, and their MAGI is $500,000. This means they exceed their filing status threshold by $250,000, and will certainly be subject to the NIIT if they have net investment income. After all calculations are rounded up for the year, their net investment income comes out to $100,000. This means they will be subject to the 3.8 percent NIIT on the $100,000, as it is the lesser of the two numbers. Kelly and John would then need to pay $3,800 in NIIT tax, as $100,000 x .038 = $3,800. Had their net investment income been, let’s say $300,000, then Kelly and John would pay 3.8 percent on the $250,000 by which their MAGI exceeds the income thresholds. Here, Kelly and John would pay $9,500 in NIIT tax, as $250,000 x .038 = $9,500. How to avoid the NIIT
If you’re worried you might be subject to the extra tax, there are several ways to offset net income. The best thing to do is speak to a licensed accounting professional who can assist in making sure whatever you offset is IRS-friendly. But for reference, there are some helpful ways individuals can avoid being subject to paying additional tax on their net investment income. Overall, the goal is to reduce your taxable income so that you can fall below the income threshold. Popular ways of doing this are by contributing to tax-advantaged plans such as a , , or . This can also be done by offsetting (non-qualified) investment losses against some of your investment gains. Individuals achieve this by using their losing investments to reduce the taxable amount of their winning investments, in what is called . Another strategy is to increase the amount you claim for certain investment expenses, which then lowers net investment income. These can be expenses you , trading fees and even state taxes. Property taxes on investment properties might even pass as a way to offset net investment income, but again it’s important to be careful it’s properly titled and legal. If these approaches still do not lower your income significantly enough to avoid the additional tax, then you’ll need to explore other deductions, ideally with a CPA. Learn more
SHARE: Bankrate reporter Georgina Tzanetos covers investing and retirement. Brian Beers is the managing editor for the Wealth team at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money. Related Articles