The net investment income tax is coming due for millions more taxpayers than a decade ago. That's no accident. Created as part of the Health Care and Education Reconciliation Act 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 excess of their modified adjusted gross income (MAGI) above the threshold amount.
NIIT applies to individuals, estates, and trusts that have net investment income and modified adjusted gross income above certain thresholds. For individuals, the threshold is $200,000 for single filers and $250,000 for married filing jointly. For estates and trusts, the threshold is $12,150 for 2021.
But what is net investment income? It includes income from interest, dividends, capital gains, rental and royalty income, and non-qualified annuities. It also includes income from passive activities, such as partnerships and S corporations, and gains from the sale of a principal residence that exceeds the exclusion amount.
Long-term capital gains tax and short-term capital gains tax are two types of capital gains tax triggers that investors should be aware of. Long-term capital gains tax is applied to investments held for more than one year, while short-term capital gains tax is applied to investments held for less than one year. The tax rate for long-term capital gains ranges from 0 percent to 20 percent, depending on your income level.
To calculate capital gains tax, subtract the basis (the original purchase price plus any commissions or fees) from the sale price and multiply the resulting profit by the capital gains tax rate. You can reduce your tax bill by offsetting capital gains with capital losses from other investments.
Deciding which accounts you'll withdraw money from – and when you'll take it – is an important decision in retirement. Traditional IRA and 401(k) withdrawals are taxed as ordinary income, while Roth IRA withdrawals are tax-free. By managing your withdrawals, you can reduce your tax bill and maximize your retirement income.
Real estate investment trusts (REITs) are another investment option that can affect your tax bill. REITs are securities that invest in income-producing real estate, and they offer unique tax advantages. REITs are not subject to federal income tax if they pay out at least 90 percent of their taxable income to shareholders as dividends. As a result, REIT investors may receive higher dividends than investors in other types of investments.
New progressive programs in Minnesota—and their supporting tax policies—will test whether states can enact changes typically under the purview of the federal government. These programs include a state-run public option for health insurance, a paid family and medical leave program, and a state Earned Income Tax Credit. These programs may lead to changes in federal tax policy and could affect investors.
It's great to see college students, teenagers, and even younger children learn how to invest their money. Acquiring that knowledge at a young age can help set them up for financial success in the future. However, it's important to remember that investments are subject to taxes, and young investors should be aware of the tax implications of their investments.
In conclusion, understanding and managing your tax bill is an important part of investing. The net investment income tax, capital gains tax, and retirement planning are all important considerations for investors. By staying informed and taking advantage of tax-efficient investment strategies, you can reduce your tax bill and maximize your investment returns.
