Minimizing Net Investment Income Tax

In 2017, a new tax legislation was enacted. This rewrites many sections of the tax code. However, the one part that remained the same is the tax on net investment income. However, there are different ways you can minimize the impact by taking timely action.

Net Investment Income

Usually, the net investment income tax is equal to 3.8 percent of the lesser of your net investment income or excess modified adjusted gross income. This is over an annual threshold of $200,000 for single filers. For joint filers, the annual threshold is $250,000.

Most investment income items make up net investment income tax. This can include interest, dividends, capital gains, and gains from investments in passive activities. However, there are other items that are excluded from these calculations. This may include distributions from IRAs, qualified retirement plans, and income from active businesses.

Reducing Net Investment Income Tax

There are ways to minimize the tax damage even if this tax applies to your situation. This can be done by reducing net investment income, modified adjusted gross income, or even both. The following are some ways this may be accomplished:

  • Increasing contributions to qualified retirement plans. This can include a 401k.
  • Harvest capital losses to offset high-taxed capital gains
  • Postpone large capital gains to a future year
  • Set up a charitable remainder trust (CRT) that provides an income stream with tax benefits
  • Shift high-taxed income to family members in lower tax brackets
  • Sell real estate on the installment basis
  • Switch from dividend-paying stocks to growth stocks that you can hold until you are in a low tax year
  • Invest in municipal bonds, also known as “munis”, or muni bond funds that product tax-free income
  • Arrange a tax-free like-kind exchange of real estate instead of realizing a large capital gain

All people’s financial situations are different. Because of this, there are other financial factors that can affect the strategies listed above. This is why it can be beneficial to contact an experienced and certified public accountant and financial consultant to guide you through this process. This can help you reduce your net investment income tax.

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Werdann DeVito LLC is an experienced Certified Public Accountant firm serving clients throughout New Jersey with all of their financial needs. If you need quality assistance with accounting, tax, or consulting services, contact Werdann DeVito LLC today.