Introduction Higher earners may find themselves subject to the 3.8% net investment income tax (NIIT) every year. This tax, implemented in 2013 as part of the Affordable Care Act, applies to individuals with a modified adjusted gross income (MAGI) above certain thresholds. In this article, we will explore the net investment income tax for 2023, discuss its implications, and provide strategies to reduce your tax bill.
Understanding the Net Investment Income Tax The net investment income tax is an additional tax imposed on certain types of investment income, including interest, dividends, capital gains, rental income, and passive income. It applies to individuals with a MAGI exceeding $200,000 for single filers and $250,000 for married couples filing jointly. However, it is essential to note that not all investment income is subject to this tax.
Long-Term vs. Short-Term Capital Gains Tax One important aspect of the net investment income tax is how it treats long-term and short-term capital gains. Long-term capital gains are generally taxed at a lower rate than short-term capital gains. By holding investments for more than one year, you may benefit from the lower long-term capital gains tax rates and reduce your overall tax liability.