What are you doing about NIIT?

[TheWizard]

Net Investment Income Tax is an additional 3.8% tax that we owe on investment income once your AGI is over $200k (single) or $250k (MFJ). Those thresholds are not adjusted for inflation.

Investment income includes interest, dividends, CGDs, and realized CGs from selling holdings in your taxable account.
In my case, that bumps my marginal tax rate from 24% to 27.8% for Ordinary Income like interest, and from 15% to 18.8% for preferenced things like QDivs.

I was barely into NIIT territory on my 2024 return, so it got me thinking. Here's a few changes on my list now:

1) my AA for my taxable account has been 95/5, where the 5 is cash in my settlement fund earning 4% interest. I'll be changing this to a 100/0 AA to hold minimal cash going forward. This kinda made sense to do even before NIIT was an issue.

2) consider doing larger QCDs if you're not already QCDing your entire RMD. I might not reduce my NIIT to zero in some future years, but it's a step in the right direction.

3) stop doing additional Roth conversions to the extent they push you/me further into NIIT territory. I already have a good sized Roth that I'll likely never deplete.

4) when time comes for next vehicle purchase in a few years, instead of taking $50k from taxable account with LTCGs, consider taking most of it from Roth IRA.

That's my list, what are others thinking?
I suppose for some folks whose AGI is waaay over NIIT thresholds, they might just shrug and carry on...

 

[rodi]

It doesn't apply to me . But just like IIRMA I'm paying attention.

 

[Sunset]

I understand a desire to avoid NIIT, as it saves money if you avoid it without decreasing overall income/growth created.

Doing larger QCDs doesn't really accomplish this, as now have less net income/growth, it just goes to a different place. On that logic, perhaps one could eliminate taxes by simply donating all their money.

You could hold cash (or equivalents like MM/short bond ladder) in IRA. Probably still important for many to hold cash to avoid selling stocks during a sharp decline.

Overall, paying NIIT is a nice problem to have.

 

[Closet_Gamer]

I’m not aware of a path to avoid this problem other than all the usual vehicles for keeping ordinary income down.

 

[Texas Proud]

Since I am not even close I do not care... my brother on the other hand complains about it...

 

[aja8888]

I'm not on that "A Team!" I am worried about IIRMA being single now.

 

[audreyh1]

Honestly, I don’t worry much about NIIT. So my cap gains tax goes from 15% to 18.8% on what exceeds the total limit. it’s usually not by much. If cap gains are high enough you jump all the way up to 23.8% rate. No 20% for you!

I’m usually busy fighting the middle IRMAA brackets.

I have worked hard over the years to reduce the long-term cap gains distributions thrown off by my mutual funds.

 

[SecondCor521]

Net Investment Income Tax is an additional 3.8% tax that we owe on investment income once your AGI is over $200k (single) or $250k (MFJ). Those thresholds are not adjusted for inflation.

I do a tax return for a family member affected a little bit by NIIT.

Investment income includes interest, dividends, CGDs, and realized CGs from selling holdings in your taxable account.
In my case, that bumps my marginal tax rate from 24% to 27.8% for Ordinary Income like interest, and from 15% to 18.8% for preferenced things like QDivs.

Yup. Overall I just look at it as another thing that affects the marginal rates.

I was barely into NIIT territory on my 2024 return, so it got me thinking. Here's a few changes on my list now:

1) my AA for my taxable account has been 95/5, where the 5 is cash in my settlement fund earning 4% interest. I'll be changing this to a 100/0 AA to hold minimal cash going forward. This kinda made sense to do even before NIIT was an issue.

Ditto. The ordinary dividends in my family member's taxable account is about half of what it was last year due to a similar reduction in VMFXX.

2) consider doing larger QCDs if you're not already QCDing your entire RMD. I might not reduce my NIIT to zero in some future years, but it's a step in the right direction.

This only works if you want to give more money away. You lose a dollar in donation but only save 27.8 cents in federal taxes (and probably some in state taxes as well).

Well, there is an exception. If a QCD can get you under an IRMAA cliff by meeting an otherwise taxable RMD, then it can be profitable to do so. My relative is not in this situation.

3) stop doing additional Roth conversions to the extent they push you/me further into NIIT territory. I already have a good sized Roth that I'll likely never deplete.

Maybe. We do Roth conversions for my family member taking the marginal rate into account, which means taking NIIT and IRMAA and the rest of it into consideration. In my family member's case, it meant doing a modest Roth conversion up to the top of the 22% bracket.

4) when time comes for next vehicle purchase in a few years, instead of taking $50k from taxable account with LTCGs, consider taking most of it from Roth IRA.

Again, maybe this makes sense, maybe not. It would depend on what the tax rate would be on those LTCGs. Maybe they can be had for a relatively low tax cost, maybe not.

That's my list, what are others thinking?

The only other thing in my tax notes for my family member is tax loss harvesting, although in their case it's too tricky (wash sales across three different accounts) for too little value so I don't bother. But might help some people.

If you're young enough, HSA contributions might be a thing too.

 

[SnowballCamper]

There is always one sure way to reduce your taxes, reduce your taxable income. Does the NIIT affect municipal bond interest?

 

[audreyh1]

There is always one sure way to reduce your taxes, reduce your taxable income. Does the NIIT affect municipal bond interest?

I don’t think so as NIIT is based on AGI and muni income doesn’t show up in AGI.

 

[TheWizard]

It doesn't apply to me . But just like IIRMA I'm paying attention.

IRMAA tiers adjust each year for inflation nowadays, similar to tax brackets. NIIT does not...

 

[TheWizard]

I understand a desire to avoid NIIT, as it saves money if you avoid it without decreasing overall income/growth created.

Doing larger QCDs doesn't really accomplish this, as now have less net income/growth, it just goes to a different place. On that logic, perhaps one could eliminate taxes by simply donating all their money...

I totally agree that eliminating all taxes isn't a reasonable goal.
So for people with charitable inclinations, it's a bit of a balancing act. If you have a decent amount of investible assets that have grown significantly during the year, then donating $2000 additional from your RMD is pocket change. It doesn't need to eliminate NIIT...

 

[RF]

Thanking my lucky stars that I have enough money that I have to pay it.

 

[GrayHare]

It does get tempting to put it all in BRKB. No divs and no cap gains until you sell some.

"If Life Is a Bowl of Cherries, What Am I Doing in the NIITs?" - Irmaa Bombeck

 

[Koolau]

Doing larger QCDs doesn't really accomplish this, as now have less net income/growth, it just goes to a different place. On that logic, perhaps one could eliminate taxes by simply donating all their money.

Even THAT won't w*rk. I forget the categories but only 50 or 60% can be donated in a year (though you can carry over the remainder IIRC).

I haven't hit NIIT yet, but I'm concerned about it (as well as IRMAA).

 

[Sunset]

Since I am not even close I do not care... my brother on the other hand complains about it...

Well that is just niit-picking

 

[audreyh1]

By spending more you can reduce your investments that produce taxable income, FWIW.

 

[jebmke]

I consider it in making a choice between US Treasury funds and Tax-exempt funds. Otherwise, it is what it is.

 

[Exchme]

I'm thinking you need to run the numbers on 3 and 4. For instance, on 3), if you are going to be in the 32% bracket sometime in the future, doing conversions now at 24% + 3.8% NIIT might still be worth it.
On 4), if you have so much RMD that you plan to up your QCDs to give it away, why are you short of cash and need to sell assets?

 

[TheWizard]

Even THAT won't w*rk. I forget the categories but only 50 or 60% can be donated in a year (though you can carry over the remainder IIRC).

I haven't hit NIIT yet, but I'm concerned about it (as well as IRMAA).

That percentage limitation and carryover is for charitable DEDUCTIONS on schedule A.
QCD limit is $108,000 per person this year with almost no restrictions.
Only one I recall is that if you are somehow still contributing earned income to your tIRA, then QCD limit is reduced by that amount...

 

[Winemaker]

I just try to limit my investment income and AGI to avoid the $250k threshold.

 

[TheWizard]

I'm thinking you need to run the numbers on 3 and 4. For instance, on 3), if you are going to be in the 32% bracket sometime in the future, doing conversions now at 24% + 3.8% NIIT might still be worth it.
On 4), if you have so much RMD that you plan to up your QCDs to give it away, why are you short of cash and need to sell assets?

Good points.
In my case, I can likely avoid the 32% bracket under the present tax system since it's inflation adjusted.

I've only been doing small Roth conversions (<$20k) last few years since RMDs started. I may just cease doing them entirely.

My RMD amount isn't huge; it's less than my SS amount. I do move excess retirement income from checking to my taxable account on a monthly basis and then into stock ETFs per #1 above.

When buying a new vehicle, I usually procrastinate a few months while I'm thinking about it, and then there's maybe two months more after factory order goes in before it gets delivered. Past two vehicles, I think I stopped buying more ETF shares during that time and just let cash pile up. But there might not be enough without selling some shares...

 

[TheWizard]

I totally agree that eliminating all taxes isn't a reasonable goal.
So for people with charitable inclinations, it's a bit of a balancing act. If you have a decent amount of investible assets that have grown significantly during the year, then donating $2000 additional from your RMD is pocket change. It doesn't need to eliminate NIIT...

I'm not sure my earlier comment was clear.
At age 75, I'm still trying to figure out what annual level of charitable contributions I am "comfortable" with, as well as which organizations will be recipients.

This process has been ongoing for a little while now and if I avoid a certain amount of NIIT in years to come, I guess that's a bonus...

 

[Koolau]

That percentage limitation and carryover is for charitable DEDUCTIONS on schedule A.
QCD limit is $108,000 per person this year with almost no restrictions.
Only one I recall is that if you are somehow still contributing earned income to your tIRA, then QCD limit is reduced by that amount...

By a strange coincidence, $108K is right in my ballpark of 50% but YMMV.

 

[COcheesehead]

I got dinged with it twice: selling my business and selling real estate.