The NIIT is a 3.8% tax that applies to individuals, estates, and trusts. It kicks in when your net investment income or your modified adjusted gross income (MAGI) exceeds certain thresholds.
Here’s the breakdown based on filing status:
- Married filing jointly $250,000
- Married filing separately $120,000
- Single or head of household $200,000
- Qualifying widow(er) with child $250,000
Net investment income includes items like interest, dividends, capital gains, rental and royalty income, and non-qualified annuities. It generally does not include wages, unemployment compensation, Social Security Benefits, alimony, and most self-employment income.
If you owe the NIIT, you’ll need to file Form 8960. If you don’t withhold enough or fail to pay enough quarterly estimated taxes to also cover the NIIT, you may be subject to an estimated tax penalty.
Now, let’s talk about some strategies to avoid the NIIT:
- Harvest losses: Sell stocks or other securities that have declined in value to offset gains.
- Donate appreciated securities: Instead of cash, donate appreciated securities to IRS-approved charities. This way, gains won’t be included on your return, but you’ll still receive a tax deduction for the donation.
- Invest in municipal bonds: Interest income from municipal bonds is federally tax-exempt and also state exempt if bonds are issued by your resident state.
- Invest in growth stocks: Gains won’t be taxed until the stocks are sold. Plus, growth stocks generally do not distribute dividends.
- Maximize contributions to tax-advantaged retirement accounts: Contributions to accounts like IRAs and 401(k)s are not considered net investment income.
Stay informed and consult with a tax professional to understand how this tax may impact you.
