Capital gains and NIT

[statsman]

Capital gains and NIIT

I had been searching for a decent tax calculator that could handle capital gains from a house sale we hope will happen this year when I noticed the following in the "SS and Taxes" thread: https://www.olt.com/main/home/taxestimator.asp


It doesn't calculate the capital gains for me, but that's okay. I can estimate it based on expected selling prices of the house. But when I entered in a large capital gains for the calculator ($800K) with our income ($70K), the net investment tax (NIT) was $601. That does not appear to be even close to what it should be. Maybe my understanding of how NIT is calculated is off.


Then again, this tax calculator presented me with an AMT under this scenario, something I hadn't accounted for in my calculations.

 

[Dash man]

“An investment property owner selling an investment property can potentially owe up to four different taxes: (1) Deprecation recapture at a rate of 25% (2) federal capital gain taxed at either 20% or 15% depending on taxable income (3) 3.8% net investment income tax (“NIIT”) when applicable and (4) the applicable state tax rate (as high as an additional 13.3% in California.)”
From APIExchange.com

 

[statsman]

I understand the federal capital gains taxation. We will be right at the end of the 0% bracket, meaning the first $400K (or so) of the capital gains will be at the 15% rate, and any amount past that at the 20% rate. I also understand that California doesn't have a capital gains rate, this it is all income. That $800K capital gains example is going to produce an additional $75-80K in CA income states. This is a house we own and lived in for 23 years, so no depreciation, etc.


For NIIT (thanks for the correction), I thought it was applied to any capital gains (including house sales) beyond a certain amount (income plus capital gains exceeding $250K).

 

[Sunset]

I understand the federal capital gains taxation. We will be right at the end of the 0% bracket, meaning the first $400K (or so) of the capital gains will be at the 15% rate, and any amount past that at the 20% rate. I also understand that California doesn't have a capital gains rate, this it is all income. That $800K capital gains example is going to produce an additional $75-80K in CA income states. This is a house we own and lived in for 23 years, so no depreciation, etc.


For NIIT (thanks for the correction), I thought it was applied to any capital gains (including house sales) beyond a certain amount (income plus capital gains exceeding $250K).

Your principal residence has some exemption, I don't live in CA, so perhaps your place is selling for SO MUCH that you are merely discussing the excess of the $500K (I think) exemption ??

 

[statsman]

Your principal residence has some exemption, I don't live in CA, so perhaps your place is selling for SO MUCH that you are merely discussing the excess of the $500K (I think) exemption ??

Yeah, the amount I am using in the above example is the excess beyond the exemption. Some sites don't mention primary house sales in the NIIT calculations, while some sites do. I normally wouldn't have to deal with it, but this year (or next, if the house doesn't sell in a couple of months) will be the exception.

 

[Dash man]

So you’ll be using the $500,000 capital gain exemption for a married couple when selling your home?

 

[statsman]

So you’ll be using the $500,000 capital gain exemption for a married couple when selling your home?

Yes. I would have expected the $800K taxable capital gains ($1.3M total capital gains on the house minus the $500K exemption) along with $70K MAGI would have triggered an NIIT well over $20K, not an amount under $1000 which, when divided by 3.8%, equals our taxable interest amount.

 

[TwoByFour]

Hmm, looks like a bug in the tax estimator to me.

 

[Dash man]

I didn’t see any indication of NIIT in Pub 523.

https://www.irs.gov/pub/irs-pdf/p523.pdf

Or Form 8960:

https://www.irs.gov/pub/irs-pdf/i8960.pdf

 

[TwoByFour]

The IRS has some nice examples of the NIIT here:
https://www.irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax

One of them (#11) is quite similar to the OP's case, large cap gains from a house sale.

 

[Dash man]

Ah, you’re right!

11. Does this tax apply to gain on the sale of a personal residence?

The Net Investment Income Tax does not apply to any amount of gain that is excluded from gross income for regular income tax purposes. The pre-existing statutory exclusion in section 121 exempts the first $250,000 ($500,000 in the case of a married couple) of gain recognized on the sale of a principal residence from gross income for regular income tax purposes and, thus, from the NIIT.

Example 1: A, a single filer, earns $210,000 in wages and sells his principal residence that he has owned and resided in for the last 10 years for $420,000. A’s cost basis in the home is $200,000. A’s realized gain on the sale is $220,000. Under section 121, A may exclude up to $250,000 of gain on the sale. Because this gain is excluded for regular income tax purposes, it is also excluded for purposes of determining Net Investment Income. In this example, the Net Investment Income Tax does not apply to the gain from the sale of A’s home.

Example 2: B and C, a married couple filing jointly, sell their principal residence that they have owned and resided in for the last 10 years for $1.3 million. B and C’s cost basis in the home is $700,000. B and C’s realized gain on the sale is $600,000. The recognized gain subject to regular income taxes is $100,000 ($600,000 realized gain less the $500,000 section 121 exclusion). B and C have $125,000 of other Net Investment Income, which brings B and C’s total Net Investment Income to $225,000. B and C’s modified adjusted gross income is $300,000 and exceeds the threshold amount of $250,000 by $50,000. B and C are subject to NIIT on the lesser of $225,000 (B’s Net Investment Income) or $50,000 (the amount B and C’s modified adjusted gross income exceeds the $250,000 married filing jointly threshold). B and C owe Net Investment Income Tax of $1,900 ($50,000 X 3.8%).

Example 3: D, a single filer, earns $45,000 in wages and sells her principal residence that she has owned and resided in for the last 10 years for $1 million. D’s cost basis in the home is $600,000. D’s realized gain on the sale is $400,000. The recognized gain subject to regular income taxes is $150,000 ($400,000 realized gain less the $250,000 section 121 exclusion), which is also Net Investment Income. D’s modified adjusted gross income is $195,000. Since D’s modified adjusted gross income is below the threshold amount of $200,000, D does not owe any Net Investment Income Tax.

 

[statsman]

I didn’t see any indication of NIIT in Pub 523.

https://www.irs.gov/pub/irs-pdf/p523.pdf

Or Form 8960:

https://www.irs.gov/pub/irs-pdf/i8960.pdf

The IRS has some nice examples of the NIIT here:
https://www.irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax

One of them (#11) is quite similar to the OP's case, large cap gains from a house sale.

Exactly my point. I can't get a straight answer when the taxable capital gains from a house sale are subject to the NIIT, or whether these gains can push the other investment income into the NIIT.

 

[statsman]

Hmm, looks like a bug in the tax estimator to me.

I agree. Anyone know of a better tax calculator that can handle the NIIT calculation properly?

 

[Dash man]

Will this help?

https://www.irstaxapp.com/amp/who-pays-net-investment-income-tax/

 

[statsman]

Will this help?

https://www.irstaxapp.com/amp/who-pays-net-investment-income-tax/

That calculator yields what I would have expected and lines up with my spreadsheet. Thanks.

Looks like a large capital gain from our house sale is going to force all of our other income right to the 28% maximum for the AMT calculation (according to the tax calculator I linked). I'll need to adjust my spreadsheet. I'm certainly not complaining because we will be cashing out a lot from this house. This is just a far more complex tax year that we've ever had and will likely ever have now that we're retired.

 

[pb4uski]

I agree. Anyone know of a better tax calculator that can handle the NIIT calculation properly?

For something that involved, I would use TurboTax... either a pro forma return using the 2017 software and then adjust as needed, or perhaps the What-If worksheet, which has a check box to use 2018 rates... or perhaps both.

 

[kaneohe]

Have you tried other tax calculators..........https://www.mortgagecalculator.org/calcs/1040-calculator.php

or the HR Block one. I don't know if they do it correctly but they agree w/ each other
whenever I've used both.

 

[audreyh1]

You just take your AGI less standard deduction. And then subtract $250K for MFJ. Then multiply the remainder by 3.8% and that is your NIIT which you add to any other Federal taxes owed.

Turbotax will do it right using the what-if estimator for 2018 rates.

 

[statsman]

Thanks for the suggestion to use TurboTax What-If estimator. I have the desktop version for 2017, so I am in the middle of trying that out (buried feature), along with numerous tasks getting the house ready for the market.

Seems to be real close to my spreadsheet, but TurboTax doesn't have us paying the AMT, while the calculator in my OP does. $70K MAGI (not counting the capital gains). I need to read up on the AMT to see when/how it would/might hit us.

 

[audreyh1]

Thanks for the suggestion to use TurboTax What-If estimator. I have the desktop version for 2017, so I am in the middle of trying that out (buried feature), along with numerous tasks getting the house ready for the market.

Seems to be real close to my spreadsheet, but TurboTax doesn't have us paying the AMT, while the calculator in my OP does. $70K MAGI (not counting the capital gains). I need to read up on the AMT to see when/how it would/might hit us.

A key AMT threshold was raised significantly. I no longer owe AMT in 2018 when have been paying it for years. You may not in fact owe AMT in 2018.

In particular, the AMT phaseout level for MFJ was raised to $1 million. This made all the difference.

AMT only applies to ordinary income, not capital gains. And if your ordinary is under the AMT exemption ($109,400 MFJ), and your total income is under the phaseout, you’re not going to owe AMT.

According to this article, people paying AMT in 2018 vs. 2017 will drop 96%! https://money.cnn.com/2018/01/18/pf/taxes/2018-amt-exemption-increase/index.html

As far as I can tell, Turbotax what-if is calculating AMT correctly under the new 2018 rules, at least in my case.

 

[statsman]

AMT only applies to ordinary income, not capital gains. And if your ordinary is under the AMT exemption ($109,400 MFJ), and your total income is under the phaseout, you’re not going to owe AMT.

Okay. I was used to paying AMT in the past because my wife and I both had decent salaries (for California). I just figured a huge capital gains would somehow push us into the AMT. The calculator linked in my OP indicates this, but it also indicated the NIIT for my estimate was under $1,000, while other sources pegged it over $20K.

 

[audreyh1]

Okay. I was used to paying AMT in the past because my wife and I both had decent salaries (for California). I just figured a huge capital gains would somehow push us into the AMT. The calculator linked in my OP indicates this, but it also indicated the NIIT for my estimate was under $1,000, while other sources pegged it over $20K.

Well it certainly did until this year.

 

[kaneohe]

You just take your AGI less standard deduction. And then subtract $250K for MFJ. Then multiply the remainder by 3.8% and that is your NIIT which you add to any other Federal taxes owed.

Turbotax will do it right using the what-if estimator for 2018 rates.

audrey.......I don't think the standard deduction is involved here......just the
MAGI which is often AGI. Also the (AGI - 250K) is compared w/ NII and the 3.8% is multiplied by the lesser of the two https://www.irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax

 

[audreyh1]

audrey.......I don't think the standard deduction is involved here......just the
MAGI which is often AGI. Also the (AGI - 250K) is compared w/ NII and the 3.8% is multiplied by the lesser of the two https://www.irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax

Thanks - yes I forgot that NIIT uses the amount pre-deductions.

And yes, if your ordinary income MFJ is above $250K, then you won’t be paying the NIIT on your ordinary income above $250K, which was not the OP scenario.