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  • Writer's pictureBridget Sullivan Mermel CFP(R) CPA

WSJ Quoted Me in Their Headline!

I was recently quoted in a Wall Street Journal article: "The 'You-Make-a-Lot-of-Money Tax' Hits More Americans" by Laura Saunders.

If you can't access the article, here are some highlights:

What is the net investment income tax?

Many Americans are unaware of the net investment income tax (NIIT) of 3.8% that applies if adjusted gross income (AGI) is above $200,000 for single filers or $250,000 for married filers. Due to inflation and higher yields on bank accounts and bonds, NIIT revenue has risen from $16 billion in 2013 to $60 billion in 2021, because the thresholds are not adjusted for inflation.

According to Bridget Sullivan Mermel, a CPA and fee-only financial planner in Chicago, more of her clients are subject to the tax each year. “Maybe $114 is a small price to pay when your interest on a “safe” investment of $100,000 rises from $1,000 to $4,000, but it’s there. I joke to clients that the NIIT is the ‘you-make-a-lot-of-money tax.”

What income is included?

The NIIT surtax applies to net capital gains on sales of assets, dividends, interest, royalties, and the net gain on the sale of a home, among other types of investment income. It, however, does not apply to wages, pensions, Social Security payments, taxable retirement plan payouts, and tax-free municipal-bond income. Currently, businesses like partnerships and S corporations are exempt from the NIIT but the Biden administration has expressed plans to remove this exemption.

NIIT Tax Strategies

Investment income takes into account the filer’s other income, wages, etc. As a result, even though these types of income are not subject to the NIIT themselves, they can push investment income over the NIIT threshold. Subsequently, many strategies include minimizing AGI in order to decrease the likelihood that investment income exceeds the threshold.

Firstly, tax-deductible contributions to traditional IRAs, 401(k)s or Health Savings Accounts can reduce the surtax by lowering AGI. Second, taxpayers taking required minimum distributions from IRAs can make donations with Qualified Charitable Distributions of up to $100,000 of IRA assets each year, reducing AGI by that amount. Thirdly, Roth conversions can reduce required minimum distributions from traditional IRAs. Because distributions from Roth IRAs are tax-free, they don’t raise AGI.

Investors can also consider tax-free municipal bonds and bond funds because their income is exempt from the NIIT. Another strategy is harvesting losses to offset capital gains on asset sales. Finally, taxpayers should consider spreading investment sales over multiple years, as this can help avoid the NIIT in certain situations.

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