Q.: You mentioned in a column that there is a 3.8% “Net Investment Income Tax.” Is that the millionaire tax I keep hearing about Congress considering?
–Keith in Tampa
A.: Keith, no. The Net Investment Income Tax (NIIT) has nothing to do with having a million-dollar net worth and it comes into play long before income reaches a million. The NIIT is triggered once Modified Adjusted Gross Income (MAGI) reaches $200,000 for a single filer, $250,000 for a joint filer, $125,000 for a married person filing separately. For a trust or estate, NIIT will apply to the lesser of undistributed net investment income (basically income not paid out to a beneficiary) or Adjusted Gross Income (“AGI”) if the trust/estate is in the top marginal tax bracket which begins at only $13,050.
The 3.8% tax applies to the lesser of the Net Investment Income or the amount by which MAGI exceeds the threshold. For example, if a couple filing a joint return has a MAGI of $300,000 and Net Investment Income of $30,000, they exceed the threshold by $50,000 and the $30,000 is subject to $1,140 of tax ($30,000 X 3.8%). If a second couple also had $300,000 of MAGI but $80,000 was Net Investment Income, their tax would be $1,900 ($50,000 X 3.8%).
I won’t list every component of MAGI or Net Investment Income here, but I’ll give you the highlights as of 2021. You can follow the details by running through Form 8960 and its instructions. These items for MAGI and Net Investment Income are not set in stone. As I write this, there are proposals in Congress to add additional items to the list of Net Investment Income.
The most common components of MAGI include:
Wages, taxable Social Security, taxable alimony, compensation (including deferred compensation)
Taxable distributions from IRAs, Roth IRAs, retirement plans, 529 plans, HSAs and nonqualified annuities
Taxable interest and dividends
Capital gains and taxable gains from the sale of other property
Rents and royalties
Net Investment Income includes among other things:
Interest and dividends
Rents and royalties
Nonqualified annuity distributions
Income from a trade or business considered a passive activity
Net Investment Income does NOT include:
Wages, taxable Social Security, taxable alimony, deferred compensation, and self-employment income subject to self-employment taxes
Pensions or taxable distributions from IRAs, Roth IRAs, retirement plans
Tax exempt income such as municipal bond interest, exempted gains from the sale of a primary residence and life insurance death benefits
Income from a trade or business not considered a passive activity
One consideration about this is if you are near the thresholds mentioned earlier or contemplating increasing your MAGI over the threshold due to something like an IRA distribution or Roth conversion, it can be a worthwhile exercise to evaluate how those things may subject your investment earnings to the NIIT.
For instance, taxable amounts attributable to a Roth conversion are not included in Net Investment Income but if the conversion pushes you above the MAGI threshold, you may subject your investment income to the additional tax.
If you have a question for Dan, please email him with “MarketWatch Q&A” on the subject line. Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo serving clients nationwide from offices in Orlando, Melbourne, and Tampa Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your