Planning for the 3.8% Investment Tax - Trust Point

Planning for the 3.8% Investment Tax

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Higher income investors need to plan for the 3.8% net investment income tax (NIIT), also known as  the unearned income Medicare contribution surtax.

Details on the 3.8% Investment Tax

The tax only applies to taxpayers with modified adjusted gross income (AGI) above these levels: $200,000 (single/head of household), $250,000 (married filing jointly/surviving spouses), or $125,000 (married filing separately). The tax is calculated on the lesser of net investment income or the amount of modified AGI in excess of the threshold.

Example. Jane’s modified AGI is $250,000, $50,000 more than the $200,000 threshold for her single filing status. Her net investment income is $60,000. Jane will owe the 3.8% tax on $50,000 since that amount is less than her $60,000 net investment income.

Net investment income generally includes interest, dividends, capital gains, annuities, royalties, and rents. It also includes income from “passive” trade or business activities, such as pass-through income from limited partnerships, S corporations, and limited liability companies in which a taxpayer does not materially participate.  It does not include wages, alimony payments, most self-employment income, qualified plan withdrawals, or social security benefits.

Potential Strategies

Taxpayers with careful planning can minimize their exposure to the tax. Various timing strategies may be effective, especially if modified AGI is close to the threshold. Other strategies that may be helpful include:

  • Increasing involvement in profitable trade or business activities so that material participation can be shown
  • Using the loss on investments to reduce the taxable amount of gains on investments, what is commonly called tax-harvesting
  • Maximizing pretax contributions to retirement plans

Of course, taxes are only one factor to consider when weighing investment decisions.  The best thing to do it to speak to your financial team of professionals at Trust Point.   Give us a call at 800-368-9474 to get started.

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