Tax Planning Strategies for the 3.8% Net Investment Income Tax

Tax Planning Strategies for the 3.8% Net Investment Income Tax

Tax Planning Strategies for the 3.8% Net Investment Income Tax

Anyone who has any kind of investment income has probably wondered how tax laws will affect that income. Investment income can vary and the tax laws differ as well. As with many tax laws, how much investment income you actually make will play a big role in how much you are taxed.

What, When, Who?

However, before we look at the details of how the Net Investment Income Tax (NIIT) works and the strategies to avoid it, let’s first answer a few important questions about the NIIT.

  • What is the NII Tax? – The NIIT is imposed by section 1411 of the Internal Revenue Code. The NIIT only applies to some net investment income at a 3.8 percent rate. It also only applies to people, trusts or estates that exceed the statutory threshold amounts.
  • When did it take effect? – The NIIT first went into effect at the beginning of 2013. Although it went into effect in 2013 it did not apply to the 2012 tax year.
  • Who is subject to the tax? – Not everyone is subject to the NII tax. Only those who exceed the thresholds amounts – which are listed later in this article – are subject to the NII tax. Also of note, the threshold amounts are not indexed for inflation.

What Qualifies as Net Investment Income?

Now let’s take a look at what type of income actually fits into the net investment income category. Net investment income includes the following:

  • Interest
  • Dividends
  • Annuity distributions
  • Rents
  • Royalties
  • Income from a passive activity
  • Net capital gain from the disposition of property

On the other hand, the following items are not considered net investment income:

  • Salary, wages & bonuses
  • Distributions from IRAs or qualified plans
  • Any self employment income
  • Gain on sale of active interest in a partnership or S Corp
  • Items which are otherwise excluded or exempt from income under the income tax law such as tax-exempt bonds
  • Capital gains excluded under IRC 121 and veteran benefits

How to Plan for the Net Investment Income Tax

There are several things you can do plan for this income tax, which may help lessen the blow. However, first and foremost you should understand that this tax, like many other taxes, mostly affects the wealthy. Those who make more than $200,000 a year will be hit with this tax and those who are considered extremely rich will see the biggest hit.

Planning Strategies

So let’s take a look at some of the strategies you can employ when it comes to the 3.8% Net Investment Income Tax:

Strategy 1: Focus on Threshold Amount – By staying under the threshold amount you can avoid this tax completely. For 2014, the 3.8 % tax applies to the lesser of: Lesser of Net Investment income or the excess (if any) or – Modified AGI less threshold amount. The threshold amounts are as follows:

  • Single-$200k
  • Married-$250k
  • Married (separate) $125k
  • Estates/Trusts $12,125

Strategy 2: Using Roth IRA conversions

Strategy 3: Using Installment sales

Strategy 4: Using Non-Grantor Charitable Lead Trust (CLTs)

Strategy 5: Using Charitable Remainder Trust (CRTs)

The next six strategies all focus on reducing your net investment income, which may help you escape the NIIT. You can do that by focusing on the following sources of income:

Strategy 6: Municipal bonds

Strategy 7: Tax deferred annuities

Strategy 8: Life insurance

Strategy 9: Rental real estate

Strategy 10: Oil and gas investments

Strategy 11: Timing of estate/trust distributions

GROCO Knows How To Help

The bottom line is that the IRS is always looking for more ways to collect on taxes and that’s especially true for the wealthy and extremely rich. By employing one or more of these strategies you might be able to avoid the 3.8% Net Investment Income Tax. If you need more help with planning for this tax or further explanation on any of these strategies, then contact us at GROCO. We can help you make the best choices for your investment income tax planning. Call us at 1-877-CPA-2006 or click here to contact us online.

We hope you found this article about “Tax Planning Strategies for the 3.8% Net Investment Income Tax” helpful.  If you have questions or need expert tax or family office advice that’s refreshingly objective (we never sell investments), please contact us or visit our Family office page  or our website at www.GROCO.com.  Unfortunately, we no longer give advice to other tax professionals gratis.

To receive our free newsletter, contact us here.

Subscribe our YouTube Channel for more updates.

Alan Olsen, CPA

Alan Olsen, is the Host of the American Dreams Show and the Managing Partner of GROCO.com.  GROCO is a premier family office and tax advisory firm located in the San Francisco Bay area serving clients all over the world.

 

Alan L. Olsen, CPA, Wikipedia Bio

 

 

GROCO.com is a proud sponsor of The American Dreams Show.

 

American-Dreams-Show-Accounting-firm-in-ca-cpa-tax-advisors-groco-alan-olsen

The American Dreams show was the brainchild of Alan Olsen, CPA, MBA. It was originally created to fill a specific need; often inexperienced entrepreneurs lacked basic information about raising capital and how to successfully start a business.

Alan sincerely wanted to respond to the many requests from aspiring entrepreneurs asking for the information and introductions they needed. But he had to find a way to help in which his venture capital clients and friends would not mind.

The American Dreams show became the solution, first as a radio show and now with YouTube videos as well. Always respectful of interview guest’s time, he’s able to give access to individuals information and inspiration previously inaccessible to the first-time entrepreneurs who need it most.

They can listen to venture capitalists and successful business people explain first-hand, how they got to where they are, how to start a company, how to overcome challenges, how they see the future evolving, opportunities, work-life balance and so much more..

American Dreams discusses many topics from some of the world’s most successful individuals about their secrets to life’s success. Topics from guest have included:

Creating purpose in life / Building a foundation for their life / Solving problems / Finding fulfillment through philanthropy and service / Becoming self-reliant / Enhancing effective leadership / Balancing family and work…

Untitled_Artwork copy 4

MyPaths.com (Also sponsored by GROCO) provides free access to content and world-class entrepreneurs, influencers and thought leaders’ personal success stories. To help you find your path in life to true, sustainable success & happiness.  It’s mission statement:

In an increasingly complex and difficult world, we hope to help you find your personal path in life and build a strong foundation by learning how others found success and happiness. True and sustainable success and happiness are different for each one of us but possible, often despite significant challenges.

Our mission at MyPaths.com is to provide resources and firsthand accounts of how others found their paths in life, so you can do the same.

Posted in ,
Brian Smedley

Brian Smedley – Chief Economist at Guggenheim Investments

The Economic Forecaster – Brian Smedley Droves of anxious people take to the arid streets of Tatooine. The desert planet recently experienced a decline in GDP and now with inflation on the rise, rash financial decisions made by the population were a real danger. As the crowd continues onward, it is confronted by a stranger.…

10 Steps for TikTok Marketing

10 Steps for TikTok Marketing

With over 500 million active users, TikTok is a social media powerhouse that you can’t afford to ignore. Here are 10 steps for marketing your business on TikTok. 1.  Research your audience: Who are you trying to reach with your TikTok marketing? What are their demographics? What type of content do they consume and engage…

Business Valuation Terms Explained “DLOCK” Vs “MID”

The Discount for Lack of Control (DLOC) vs. The Minority Interest Discount (MID) The Business Valuation Glossary provides these definitions of two similar terms: Discount for Lack of Control – an amount or percentage deducted from the pro rata share of value of 100% of an equity interest in a business to reflect the absence…

The “My Path” Book is now available on Amazon! 

Dear American Dreams Show Subscribers,   “My Path” is now available on Amazon!  We are excited and proud to announce that after a decade of interviewing some of the most interesting and successful business and thought leaders in the world, the American Dreams Show’s Host, Alan Olsen, has published the first book based on a…