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NET INVESTMENT INCOME TAX (NIIT) OR "OBAMA" TAX

 

For high-income taxpayers, dealing with a regular income tax rate of 35% or 37% can be challenging. On top of that, there's an extra 3.8% net investment income tax (NIIT) to consider. The good news is that there are ways to minimize its impact.

Who's Affected?

The NIIT applies if your modified adjusted gross income (MAGI) exceeds specific thresholds:

  • $250,000 for married taxpayers filing jointly and surviving spouses,
  • $125,000 for married taxpayers filing separately,
  • $200,000 for unmarried taxpayers and heads of household.

The taxed amount is the lesser of your net investment income or the excess of your MAGI over the applicable threshold ($250,000, $200,000, or $125,000).

What's Included in Net Investment Income?

Net investment income encompasses interest, dividends, annuities, royalties, and rental income—unless they're part of an active trade or business. Passive activity income from a trade or business and income from trading in financial instruments or commodities are also subject to NIIT.

However, certain income types are exempt from NIIT, like tax-exempt interest, gain from selling your main home, distributions from qualified retirement plans, Social Security benefits, wages, and self-employment income.

Reducing NIIT Impact

If you're facing NIIT, consider these strategies:

  1. Shifting Investments: If your income triggers NIIT, consider moving some income investments to tax-exempt bonds. This can lower your MAGI and help avoid the NIIT.

  2. Adjusting Investment Portfolio: Given that dividend-paying stocks are taxed more heavily with NIIT, rebalance your portfolio to emphasize growth stocks over dividend-paying ones. Capital gains from growth stocks can be deferred until they're sold, and losses can offset gains.

  3. Retirement Plan Distributions: Distributions from qualified retirement plans are NIIT exempt. If you have control over your situation, consider using qualified plans, especially if you're a small business owner.

There are more strategies related to charitable donations, passive activities, and rental income to minimize NIIT. If you're subject to this tax, including it in your tax planning is crucial. Reach out to us for personalized strategies tailored to your situation.

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