Understanding the 3.8% Net Investment Income Tax (NIIT)

Many individuals are unaware of the 3.8% Net Investment Income Tax (NIIT) due to the complex nature of the Tax code. The NIIT is an additional Tax imposed on individuals whose income is above certain thresholds. According to recent press releases from John Hancock Tax-Advantaged Dividend Income Fund (NYSE:HTD) and John Hancock Tax-Advantaged Global Shareholder Yield Fund (NYSE:HTY), both funds reported Q3 net Investment income per share of $0.261 and $0.048, respectively.

The NIIT applies to certain types of income, such as interest, dividends, capital gains, annuities, royalties, and rental income. If an individual’s taxable income is above certain thresholds, they must pay the NIIT on their net Investment income. For joint filers, the NIIT applies if their modified adjusted gross income (MAGI) exceeds $250,000, while for single filers, the MAGI is $200,000.

The NIIT does not apply to all types of income, however. It does not apply to Social Security benefits, Tax-exempt interest, qualified retirement plan distributions, or certain distributions from qualified tuition programs. It also does not apply to any income from active trades or businesses, such as a sole proprietorship or a partnership.

The NIIT is calculated as a percentage of the net Investment income. For individuals whose income falls within the applicable thresholds, the NIIT rate is 3.8%. For example, if the individual’s net Investment income is $10,000, they must pay the NIIT of $380.

The NIIT affects individuals differently depending on their income level. For those with high incomes, the NIIT can significantly increase their Tax liability. For those with lower incomes, the NIIT may not have a significant impact. Therefore, it is important for individuals to understand the NIIT and how it affects their taxable income.

To minimize the impact of the NIIT, individuals can take advantage of Tax-advantaged Investment options such as those offered by John Hancock Tax-Advantaged Dividend Income Fund (NYSE:HTD) and John Hancock Tax-Advantaged Global Shareholder Yield Fund (NYSE:HTY). These funds can help individuals reduce their Tax liability and maximize their return on Investment.