Kelly Bullis: Thoughts on net investment tax

Thanks to the 44th president, we have been stuck with a most unwieldy and poorly written tax called net investment income tax or NIIT for short.

Basically, it attempts to create a way to have the “rich” pay into the fund that pays out health insurance under Obamacare for the “poor.”

It applies when your Modified Adjusted Gross Income (MAGI)… oh don’t get me started on that again! … reaches $200,000 for singles and $250,000 for couples … oh don’t get me started on marriage penalty in tax law again! When MAGI exceed these limits, you are subject to the NIIT, which is a flat 3.8% on the lesser of your net investment income or the amount by which your MAGI exceed the threshold.

Net investment income is income from investments (interest, dividends, annuities, rentals, etc.); income from businesses you don’t materially participate in; net capital gains earned on property that is not part of an active business; income from businesses involved in trading financial instruments or commodities.

Here is another hot topic with me… not adjusting limiting thresholds to inflation. In 2013, when the law was enacted, 3.1 million taxpayers paid $16.5 billion in NIIT, in 2021, that number jumped to 7.3 million taxpayers paying over $60 billion in NIIT, almost all attributed to not raising the MAGI thresholds!

How to you limit your exposure to NIIT? Buy Muni bonds; Donate appreciated property (you get three bangs for that buck. 1. No NIIT. 2. No MAGI because you are not selling stock. 3. A tax deduction equal to the fair market value as a charitable deduction (if you itemize)); Don’t sell appreciated stocks, hold and let them grow, hoping somebody fixes or even eliminates the NIIT; Take advantage of Section 1031 exchange on real estate; Keep until death (at your death, your heirs inherit at fair market value, wiping out the taxable gain); Invest in life insurance and tax-deferred annuity products; Harvest your losses against the gains, netting as close to zero investment income as possible; Invest in real estate (try to structure your real estate investment to come up with as little investment income as possible, let the real estate grow in value, then at your death, your heirs once again escape the NIIT by getting a step-up in basis).

There you have it. A little planning goes a long way. Judge Learned Hand (yes that was his real name) once said, “There is nothing evil, sinister or wrong about arranging your affairs to minimize the amount of tax you pay. Because, taxes are an enforced extraction, not a voluntary contribution.” (Smart guy!)

Have you heard? Proverbs 14:22 says, “Don’t they go astray who plot evil? But love and faithfulness belong to those who plan good.”

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.