The net investment income tax is just one example of the complicated nature of the U.S. tax laws. The NIIT was a surtax that was created as part of the Patient Protection and Affordable Care Act, but because of its origins within Obamacare, the NIIT will likely be among the first tax provisions that the Trump administration looks to repeal. The net investment income tax is here to stay through 2016, However, after the election of President Donald Trump, the net investment income tax might well be on the endangered species list under the new system, and the tax plan that would eliminate the net investment income tax in the name of further simplifying taxes.
The Net Investment Income Tax, that went into effect on Jan. 1, 2013, is imposed at a rate of 3.8% to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts that begin at income of $125,000 a year, depend on your filing status. The 3.8% Medicare tax on net investment income only affects higher-income individuals, but that can include anyone who has a big one-time shot of investment income or gain. i.e. if you sold some company stock for a big profit, you could be a victim.
Net investment income is income received from investment assets (before taxes) such as bonds, stocks, mutual funds, loans and other investments (less related expenses). The individual tax rate on net investment income depends on whether it is interest income, dividend income or capital gains.
The 3.8% Medicare tax hits the lesser of: (1) your net investment income or (2) the amount by which your MAGI exceeds the applicable threshold. Therefore, planning strategies must be aimed at the proper target to have the desired effect of avoiding or minimizing your exposure to the tax.
If the net investment income amount is lower than your excess MAGI amount, your exposure to the tax mainly depends on your net investment income. So, you should focus first on strategies that will reduce net investment income. For instance, you could sell some loser securities from your taxable brokerage firm accounts to offset earlier gains from those accounts.
If the excess MAGI amount is lower than your net investment income amount, your exposure to the tax mainly depends on your MAGI. So, you should focus first on strategies that will reduce MAGI. For instance, making $15,000 of additional deductible contributions to your tax-favored retirement accounts would reduce your MAGI or Selling loser securities.
another possibility, is to become more active in business activities in which you’ve invested. The idea is to “convert” the income from passive to non-passive because income and gains from non-passive business activities don’t count as investment income. Also, defer gains subject to the 3.8% tax by spreading them out with an installment sale. Invest in rental real estate that is offset by depreciation deductions. Invest taxable brokerage firm account money in growth stocks. Gains are not taxed until the stocks are sold.
Thus, you might want to take steps to minimize your liability in 2016, in the hopes that you won’t have to worry about the net investment income tax for tax year 2017 and thereafter. Some of the strategies explained here are doubly effective because they can reduce your regular federal income tax bill as well as your bill for the new 3.8% Medicare tax. If you’re self-employed, some of the ideas can cut your federal tax bill three different ways: reducing your federal income tax bill, your bill for the 3.8% tax, and your self-employment tax bill.
The net investment income tax isn’t very old, but its days might be numbered under the incoming Trump administration. Waiting until later in the year could prove to be too late.
The net investment income tax is just one example of the complicated nature of the U.S. tax laws. The NIIT was a surtax that was created as part of the Patient Protection and Affordable Care Act, but because of its origins within Obamacare, the NIIT will likely be among the first tax provisions that the Trump administration looks to repeal. The net investment income tax is here to stay through 2016, However, after the election of President Donald Trump, the net investment income tax might well be on the endangered species list under the new system, and the tax plan that would eliminate the net investment income tax in the name of further simplifying taxes.
The Net Investment Income Tax, that went into effect on Jan. 1, 2013, is imposed at a rate of 3.8% to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts that begin at income of $125,000 a year, depend on your filing status. The 3.8% Medicare tax on net investment income only affects higher-income individuals, but that can include anyone who has a big one-time shot of investment income or gain. i.e. if you sold some company stock for a big profit, you could be a victim.
Net investment income is income received from investment assets (before taxes) such as bonds, stocks, mutual funds, loans and other investments (less related expenses). The individual tax rate on net investment income depends on whether it is interest income, dividend income or capital gains.
For instance, you could sell some loser securities from your taxable brokerage firm accounts to offset earlier gains from those accounts. another examples are: making of additional deductible contributions to your tax-favored retirement accounts would reduce your MAGI or Selling loser securities. become more active in business activities in which you’ve invested. The idea is to “convert” the income from passive to non-passive because income and gains from non-passive business activities don’t count as investment income. Also, defer gains subject to the 3.8% tax by spreading them out with an installment sale. Invest in rental real estate that is offset by depreciation deductions. Invest taxable brokerage firm account money in growth stocks. Gains are not taxed until the stocks are sold.
Thus, you might want to take steps to minimize your liability in 2016, in the hopes that you won’t have to worry about the net investment income tax for tax year 2017 and thereafter. Some of the strategies explained here are doubly effective because they can reduce your regular federal income tax bill as well as your bill for the new 3.8% Medicare tax. If you’re self-employed, some of the ideas can cut your federal tax bill three different ways: reducing your federal income tax bill, your bill for the 3.8% tax, and your self-employment tax bill.
The net investment income tax isn’t very old, but its days might be numbered under the incoming Trump administration. Waiting until later in the year could prove to be too late.
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