Tips on managing the Net Investment Income Tax

NIIT2014 marks the second year that many high-income clients will be hit with the 3.8 percent investment income surtax that’s part of the Affordable Care Act. The surtax on investment income applies to taxpayers with modified adjusted income above $250,000 for married filing jointly taxpayers, and $200,000 for single filers. The surtax applies to:

  • Taxable interest;
  • Qualified and non-qualified dividends;
  • Short- and long-term capital gains;
  • Annuity income (unless the annuity is held in a qualified retirement plan); and,
  • Income from passive activities (e.g., most forms of rental income).

The two primary categories of investment income not subject to the tax are exempt interest (e.g., municipal bonds) and distributions from a qualified plan, including those coming from an annuity contract.

The only potential “loophole” remaining to reduce a taxpayer’s exposure to the surtax for 2014 after Jan. 1, 2015, applies to self-employed taxpayers who maintain a SEP plan. The deadline for making deductible contributions to SEPs is the taxpayer’s filing deadline, including extensions, so they might avoid some of that 3.8 percent hit by maximizing SEP contributions.

To reduce your exposure in 2016, consider these tips:

  • Shift to munis
  • Understand portfolio analytics
  • Consider mutual funds with large embedded capital gains
  • Purchase individual stocks
  • Maximize qualified plan options
  • Review your gifting strategy

To put these tips into action, contact your ShindelRock tax adviser today.

Accounting Today, “Tax Alpha: Managing the Net Investment Income Tax