Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Questio: Form 8960 Net Investment Income Tax Income as related to Large Roth Conv.
Old 04-21-2021, 06:03 AM   #1
Recycles dryer sheets
 
Join Date: Feb 2015
Posts: 291
Questio: Form 8960 Net Investment Income Tax Income as related to Large Roth Conv.

Here is the scenario:

Wife and I are both retired and We are contemplating a larger than usual Roth Conversion this year as I will apply for MEdicare in 2024 and don't want to be hit with the MEdicare IRRMA surcharges for my 2022 MAGI going forward.
That is one issue.

The second issue is the 3.8% Medicare surcharge on a MAGI of +$250,000 (joint return) using IRS FORM 8960 - NIIT...Net Investment Income Tax.

As an example: Wife and I MAGI for 2021 as follows:

Pensions: $50,000
Dividends: $50,000
Roth Conversion: $200,000
TOTAL: $300,000

So with a MAGI of $300,000 we are over the threshold and would be subject to the MEdicare 3.8% surtax.
My question is: IS the 3.8% applied only to the Dividend Income of $50,000 OR is it also applied to the Roth COnversion amount of $200,000?
Are Roth Conversions included in this calculation?

HAving this tax apply only to the dividend income results in a surtax of $1,900 which I can accept but having it also apply to the $200,000 Roth Conv. results in a 3.8% surtax on $250,000 which comes to $9,500.
Obviously a big difference which may lead us to do a smaller Roth Conv.

Any help is appreciated.
MrLoco is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 04-21-2021, 06:30 AM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 10,999
Pretty certain it's just the part of AGI over $250K ($200K singles) that gets hit with the 3.8% NIIT. Run it through any tax program to verify. Do a $150K conversion, then $151K, and you should see a tax increase of $38, not whatever 3.8% of $251K is.
RunningBum is offline   Reply With Quote
Old 04-21-2021, 07:10 AM   #3
Thinks s/he gets paid by the post
Out-to-Lunch's Avatar
 
Join Date: Jan 2020
Location: Milwaukee
Posts: 1,214
I definitely agree with RB's suggestion to use a tax calculator on a dry run (although I believe he meant $250 and $251k).

But you can get some qualitative insight here:

From: https://www.irs.gov/newsroom/questio...ent-income-tax


Quote:
8. What is included in Net Investment Income?

In general, investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities and businesses that are passive activities to the taxpayer (within the meaning of section 469). To calculate your Net Investment Income, your investment income is reduced by certain expenses properly allocable to the income (see #13 below).

9. What are some common types of income that are not Net Investment Income?

Wages, unemployment compensation; operating income from a nonpassive business, Social Security Benefits, alimony, tax-exempt interest, self-employment income, Alaska Permanent Fund Dividends (see Rev. Rul. 90-56, 1990-2 CB 102) and distributions from certain Qualified Plans (those described in sections 401(a), 403(a), 403(b), 408, 408A or 457(b)). (Emphasis added.)
__________________
The closing years of life are like the end of a masquerade party, when the masks are dropped. -Arthur Schopenhauer, philosopher (1788-1860)
Out-to-Lunch is offline   Reply With Quote
Old 04-21-2021, 07:29 AM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 10,999
OP has $50K pension and $50K dividends, so $150/151K of conversions puts them right at $250/251K. They could also just run it as $250/251K conversions.

Actually I'm not sure whether pension is included or not.
RunningBum is offline   Reply With Quote
Old 04-21-2021, 07:31 AM   #5
Administrator
Gumby's Avatar
 
Join Date: Apr 2006
Posts: 16,763
The distribution from your traditional IRA (which is what funds the Roth conversion) increases your MAGI for purposes of determining whether you trigger the NIIT, but is not considered investment income to which the NIIT is applies. So, as you suspected, you'll pay 3.8% on only the $50k dividend income.

This site has more detail and examples: https://ultimateestateplanner.com/20...sion-planning/

Quote:
Originally Posted by RunningBum View Post
OP has $50K pension and $50K dividends, so $150/151K of conversions puts them right at $250/251K. They could also just run it as $250/251K conversions.

Actually I'm not sure whether pension is included or not.
Pensions are also part of MAGI for purposes of triggering the tax, but are not Net Investment Income to which the tax applies.
__________________
Living an analog life in the Digital Age.
Gumby is offline   Reply With Quote
Old 04-21-2021, 08:30 AM   #6
Recycles dryer sheets
 
Join Date: Feb 2015
Posts: 291
Thank you to all.

It seems the Roth Conversion itself while increasing MAGI is not included in the calculation of the NIIT which is what I suspected.
MrLoco is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Taxes: Form by form instead of interview? TromboneAl FIRE and Money 4 03-28-2016 12:03 PM
Can I re-characterize a Roth Conv if the account is closed? ERD50 FIRE and Money 5 12-16-2015 07:39 PM
Roundabout Hate & Related investment Idea ? ownyourfuture Stock Picking and Market Strategy 120 10-16-2015 09:06 PM

» Quick Links

 
All times are GMT -6. The time now is 12:21 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2021, vBulletin Solutions, Inc.