Cracking the Code of Net Investment Income Tax (NIIT)

Investing can be a great way to grow your money, but it’s important to remember that taxes often come with the territory. One tax you might encounter is the net investment income tax (NIIT), which takes a 3.8% chunk out of certain investment earnings. But don’t worry, understanding NIIT isn’t as hard as it sounds. Let’s break it down into simpler terms.

What Exactly is NIIT?

NIIT is a tax the IRS imposes on the investment income of certain folks, like individuals, estates, and trusts. It’s like a little extra fee you pay on some of the money you make from investments. For 2024, it stays at 3.8%, just like in 2023.

Who Does NIIT Affect?

Mostly, NIIT affects individual investors, but only if their investment income exceeds certain thresholds based on their filing status. Non-resident aliens usually don’t have to worry about it, unless they choose to file taxes jointly with their U.S. spouse. Estates and trusts may also get hit with NIIT if they have a lot of investment income.

What Counts as Investment Income?

Investment income includes things like interest, dividends, capital gains, rental income, and some other types of earnings from investments. But it doesn’t include regular income sources like wages or social security benefits.

How Do You Figure Out if You Owe NIIT?

The clue lies in your modified adjusted gross income (MAGI). If your MAGI is higher than certain thresholds based on your filing status, then you might owe NIIT. You can find these thresholds online or ask a tax professional for help.

Calculating Your NIIT

Once you know your MAGI and your investment income, you can figure out how much NIIT you owe. It’s usually the lesser of your investment income or the amount your MAGI exceeds the threshold.

Filing Your Taxes with NIIT

When tax time rolls around, you’ll need to fill out IRS Form 8960 along with your regular tax forms. If you’re an estate or trust, you’ll use Form 1041 instead. If you’re not sure how to do this, it might be a good idea to get some help from a financial advisor or accountant.

Getting Ready for Next Year

To avoid any surprises next tax season, you might need to adjust your tax withholding or make estimated tax payments throughout the year. This can help you avoid underpaying and getting hit with penalties.

Planning for the Future

Investing is all about planning for the future, and that includes planning for taxes too. There are tools and calculators available to help you figure out how your investments will grow over time. If you need extra guidance, a financial advisor can help you make the right choices for your financial goals.

In short, NIIT might seem like a headache, but with a little understanding and some careful planning, you can navigate it like a pro and keep your investment journey on track. If you want to talk to an accountant about NIIT, reach out to our team at Cooper Norman!