1. Introduction:
Recently, a Wall Street Journal article shed light on what’s colloquially termed as the “you make a lot of money” tax. While the term may sound unusual, it’s officially called the Net Investment Income Tax (NIIT).
2. Background:
Most average taxpayers aren’t familiar with NIIT. It’s more frequently dealt with by tax professionals. However, if you’ve experienced a significant financial windfall, perhaps from selling real estate or stock options, you might have unknowingly paid an additional 3.8% tax via your tax software.
3. What is NIIT?
The NIIT applies a 3.8% tax rate on certain net investment income of individuals, estates, and trusts with income above statutory threshold amounts. The nature of your income and your Adjusted Gross Income (AGI) determine its applicability.
4. Income Thresholds:
Single filers: Under $200,000 AGI
Married couples (jointly): Under $250,000 AGI
5. Taxable Income: Types of income subject to the 3.8% tax include:
Interest (e.g. from Dividends Capital Annuity bank accounts)
gains withdrawals (non-IRA)
Passive income (e.g., from non-managed real estate)
6. Exclusions: Certain incomes that increase your AGI but aren’t subject to the 3.8% NIIT include:
Wages and self-employment income
IRA distributions
Excluded gains from home sales
Municipal bond interest
Life insurance proceeds
Social Security payments
7. Strategic Planning: To avoid or reduce this tax, consider:
Roth IRA conversions
Maximizing IRA and 401K contributions
Investing in tax-deferred annuities
Making Qualified Charitable Distributions (for those over 70.5)
Investing in municipal bonds
Proper asset location (like holding fixed income inside an IRA)
Tax-loss harvesting
8. Key Takeaways:
While minimizing NIIT should not be the sole focus of your financial planning, being aware of it can save you money. Ensure any strategies you use fit into your broader financial goals and consult a professional before making significant decisions.
You Make a Lot of Money Tax (NIIT)
Today, Tom and I delve into the “you make a lot of money tax” as coined by a recent Wall Street Journal article. While this might be new to many of you, it’s officially known as the Net Investment Income Tax (NIIT). In this video, we break down what NIIT is, why you might’ve paid it without realizing it, and the key income thresholds you should be aware of. We also present planning strategies to navigate and potentially minimize this tax, all in the context of comprehensive financial planning. Grab our detailed show notes below for a step-by-step guide, and don’t forget to check your 1040 to find out about your AGI! If you have questions or need guidance, feel free to reach out. Enjoy the video! #NetInvestmentIncomeTax #TaxPlanning #FinancialStrategy
