Net Investment Income Tax

What is the Net Investment Income Tax?

In general, investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, passive activity income and income from businesses involved in trading of financial instruments or commodities.  The tax is 3.8% on such income.

Who is subject to it?

A 3.8 percent tax applies to certain net investment income of individuals with income above a threshold amount. The threshold amounts for 2019 are $250,000 (married filing jointly and qualifying widow(er) with dependent child), $200,000 (single and head of household), and $125,000 (married filing separately). These thresholds are adjusted annually.  Thus, while the top tax rate for qualified dividend income is generally 20 percent, the top rate on such income increases to 23.8 percent for a taxpayer subject to the net investment income tax (NIIT).

How to manage NIIT?

The first step to managing the tax impact of your portfolio and passive activity income is to determine the year-to-date amounts of income in these categories.  After you have identified and calculated the year-to-date total amounts, then you can determine if the tax will apply to you. If you have an investment advisor, meet with them to discuss the investment activity they manage.  As an investment professional, their experience and knowledge can assist in projecting the potential income activity for the remainder of the year. If you have a tax professional, meet with them to discuss the tax impact of the Net Investment Income Tax and potential options to manage the overall tax impact.  As a tax professional, their experience and knowledge can assist in calculating the tax impact of various options available. When you work as a team with your investment advisor and tax professional, you can maximize the benefits of your investment activity.

If you would like additional information, do not hesitate to contact me.

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