Net Investment Income Tax

Ways to minimize net investment income (NII) tax

The new tax legislation enacted late in 2017 rewrites large sections of the tax code. However, one key provision for investors has remained in place: the tax on net investment income (NII). Although it’s still on the books, you can minimize the impact for this year with some timely tax action.

NII tax background

Generally, the NII tax is equal to 3.8 percent of the lesser of your NII or excess modified adjusted gross income (MAGI) over an annual threshold of $200,000 for single filers ($250,000 for joint filers).

NII includes most investment income items like interest and dividends, capital gains and gains from investments in passive activities. But certain other items — such as distributions from IRAs and qualified retirement plans and income from an active business — are specifically excluded from this calculation.

How to reduce NII tax

Even if the tax applies in your situation, you may minimize the tax damage by reducing NII, MAGI or both. Consider these ideas:

  • Increase contributions to qualified retirement plans like a 401(k).
  • Harvest capital losses to offset high-taxed capital gains.
  • Postpone large capital gains to a future year.
  • Invest in municipal bonds (“munis”) or muni bond funds that produce tax-free income.
  • Switch from dividend-paying stocks to growth stocks you can hold until you’re in a low tax year.
  • Set up a charitable remainder trust (CRT) that provides an income stream with tax benefits.
  • Arrange a tax-free like-kind exchange of real estate instead of realizing a large capital gain.
  • Sell real estate on the installment basis.
  • Shift high-taxed income to family members in lower tax brackets.

Of course, other financial factors may affect these strategies. Call today for help developing a plan that suits your needs.