Created as part of the Health Care and Education Reconciliation Act to fund healthcare reform in 2010, the net investment income tax (NIIT) is a tax on net investment income. Those who are subject to the tax will pay 3.8 percent on the lesser of the two: their net investment income or the amount by which their modified adjusted gross income (MAGI) exceeds the threshold amount. The threshold amount is $250,000 for married couples filing jointly, $200,000 for single filers, and $125,000 for married taxpayers filing separately.
Net investment income includes income from interest, dividends, capital gains, rental income, and other passive sources. It does not include income from wages, self-employment, or active business income. The NIIT is in addition to regular income tax and is reported on Form 8960.
Long-term capital gains tax and short-term capital gains tax are two types of capital gains tax triggers. Long-term capital gains are taxed at a lower rate than short-term capital gains. The capital gains tax rate is dependent on the type of asset, your taxable income, and how long you held the property. Short-term capital gains are taxed at the same rate as ordinary income.
To cut your tax bill, you can utilize tax-loss harvesting, which is the process of selling investments at a loss to offset gains in other investments. You can also consider tax-deferred accounts such as individual retirement accounts (IRAs) and 401(k)s.
The NIIT has been a topic of discussion in recent years, with some lawmakers proposing to increase the threshold amount or repeal the tax altogether. However, as of 2023, there have been no changes to the NIIT. It remains an important consideration for investors with significant passive income.
Stellus Capital Investment Corporation (NYSE:SCM) announced its financial results for the first quarter of 2023, reporting a total investment income increase of 65% to $1.85 million compared to the first quarter of the previous year. The company also reported a net investment income of $0.32 per share.
PhenixFIN Corporation (NASDAQ:PFX) also reported its financial results for the first quarter of 2023, reporting a net investment income of $0.46 per share. The company's total investment income was $2.1 million for the quarter.
Like other earnings and realized gains on investments, dividend income is taxable. The tax rate on dividends, however, is dependent on a variety of factors such as your tax bracket and the type of dividend received.
Bain Capital Specialty Finance, Inc. (NYSE: BCSF) announced its financial results for the first quarter of 2023, reporting a net investment income of $0.41 per share. The company's total investment income was $16.1 million for the quarter.
Overall, the NIIT remains an important consideration for investors with significant passive income. With no changes expected in the near future, it is important to understand how the tax works and how it may impact your investment strategy. Utilizing tax-efficient strategies such as tax-loss harvesting and tax-deferred accounts can help minimize the impact of the NIIT on your investment earnings.