Kelly Bullis
Ever heard of the Net Investment Income Tax (NIIT)? You can thank President Obama for this one. It’s a part of Obamacare. Designed to make “the rich pay for the poor health insurance.”
How it works: If you are married and have modified adjusted gross income (MAGI) (don’t get me started on that one…you know the MAGI that changes like a chameleon) of $250,000 (or $200,000 for singles) and you have any investment related income, you are going to be hit with the NIIT. Basically, you take the lessor of the difference between your actual MAGI and the $250,000 number or your total passive income (usually interest, dividends, capital gains, some partnership income, and some rents), and multiply by 3.8%.
An example: You’re married with $300,000 of MAGI, of which $80,000 is from passive income. Your NIIT computation is $300,000 minus the threshold of $250,000 or $50,000. Compare the $50,000 to your total passive income of $80,000, you end up taking the lessor of the two, or $50,000. Multiply that $50,000 times 3.8% and your NIIT comes to $1,900.
So how can you reduce your risk of being hit with this NIIT? Here are a few ideas. (Not all inclusive.)
You could add municipal bonds to your investment portfolio. Interest earned from Muni bonds are basically exempt from all federal income tax, including the NIIT.
Another option is to postpone capital gains. Both short-term and long-term capital gains are subject to NIIT. So timing your gains to occur in a tax year that you are less likely to cross that NIIT threshold might be a good idea.
You could “harvest some capital losses.” That basically is the process of selling securities that have losses to reduce the tax impact of other securities you sold at gains. It is an extra benefit if the capital losses you create offset short-term capital gains as well as reducing your passive income subject to the NIIT.
If you are selling real estate, consider spreading out the receipt of the proceeds over several years. That has multiple benefits. It reduces your total taxable income, keeping you in lower federal income tax rates as well as lower capital gain tax rates, but it also reduces your total passive income subject to the NIIT.
If you are having to take large IRA Required Minimum Distributions (RMDs) that are pushing your MAGI into NIIT territory, you could consider doing a ROTH IRA conversion. It creates a one-time hit on taxable income, but now you don’t have to take out the larger RMDs any longer, and any ROTH IRA distributions are tax free in the future. Reducing regular taxable income and also your MAGI subject to the NIIT.
Have you heard? Prov 24:27 says, “Prepare your work outside, and get your fields ready. Afterwards, build your house.”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 775-882-4459. On the web at BullisAndCo.com Also on Facebook.