When does a NIIT tax wipe out your profit?

[Brook2]

I’ve been reading about Net investment income tax (NIIT), which is an additional 3.8% tax on money you earn from your investments (dividends, interest payments, capital gains, royalty payments, rental income.)

So for example, for MFS if you made $125,001 capital gains when you cashed out a mutual fund, would you have to pay both 1) regular capital gains tax 2) plus another 3.8% ($4,750)?

In a situation like this, is there a point at which it is not worth investing in the first place, such as low paying vehicles like CD’s that have little return? Or am I missing something?

 

[Al18]

For NIIT for MFJ doesn’t kick in until you are above $250,000 adjusted gross according to https://www.irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax

 

[Brook2]

Really? here's the table I got from Forbes https://www.forbes.com/advisor/inve...lculated,and subtracting any related expenses.

oops I was looking at Married filing separate,
[I will edit] but still my question is the same: This seems like a large tax and is there a point at which it is not worth investing in the first place, such as low paying vehicles like CD’s that have little return?

 

[audreyh1]

It won’t wipe out your profit. It’s a percentage of your investment gains.

I don’t get your “is it worth it” scenario.

If you are saying you make 3.8% more but have to pay back 3.8% more of that 3.8% you gained - it’s still a small percentage, not the whole thing.

And it only applies to the investment income which exceeds 200K/250K of your total income.

Say you made the $125001 of capital gains, and your other taxable income was $100,000, for the single filer only $25,001 would be subject to NIIT.

 

[Al18]

This tax has been in effect since 1/1/2013. Seems the smart thing to do would be to sell the fund over multiple years, so not to trigger the tax.

If you are a high net worth individual who regularly makes this kind of income, you may want to seek out advice from a CPA to reduce the amount taxed.

 

[Dash man]

NIIT is an annoyance tax, but nothing that would effect my investment decisions.

If you make $4,000 interest on a $100,000 CD, and your total income was over $250,000, your NIIT tax would only be $152.

 

[SevenUp]

So for example, ...if you made [$X + $1 (where $X is the lower limit on the next tax bracket)] when you cashed out a mutual fund, would you have to pay [the higher bracket amount on your whole income]?

The answer to that general question is "no, you pay the higher bracket rate only on the amount of income above the lower bracket limit."

Same goes for the NIIT: you owe 3.8% only on the amount of interest/dividends/etc. that, together with all other gross income, exceeds the NIIT cutoff.

 

[Gotadimple]

The NIIT also applies to the sale of a personal residence where the net gain exceeds the exclusion of income (single $250K, married $500k). And that excess amount is over the exclusion that pushes your AGI over $200K (single) $250K (married). The excess is taxed at 3.8%. It's complicated.


https://www.irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax

 

[audreyh1]

Any taxable income (AGI) that pushes you above the $200K/$250K threshold, the NIIT will apply to investment income (being dividends, interest, capital gains) above that threshold.

If it’s all wage earnings, SS, or IRA distributions, then no.

 

[marko]

In a situation like this, is there a point at which it is not worth investing in the first place, such as low paying vehicles like CD’s that have little return? Or am I missing something?

With the exception of TLH, I never let taxes influence my investment decisions.

 

[audreyh1]

With the exception of TLH, I never let taxes influence my investment decisions.

Exactly! Other than generally to hold less tax efficient assets in my tax-deferred accounts.

 

[sheldon cornped]

NIIT is an annoyance. It has hit us the last two years from capital gains while trying to unwind from a concentrated stock position. Just like IRMAA surcharges have crept into the picture. No one will have any sympathy for those who have this "good" problem. So we try our best to keep from any other triggers that bite too hard. The trigger limits that someone posted here have been very helpful in figuring out where we want to land tax-wise.

 

[marko]

Just like IRMAA surcharges have crept into the picture. No one will have any sympathy for those who have this "good" problem.

+1. Agreed!
Crying because one made too much money is never a good look.

 

[Aerides]

In a situation like this, is there a point at which it is not worth investing in the first place, such as low paying vehicles like CD’s that have little return? Or am I missing something?

Only if you'd have made "almost" as much in another vehicle.

I would rather play an extra 3-4% on a 100k gain, than nothing, on a 50k gain.

 

[OverThinkMuch]

For NIIT for MFJ doesn’t kick in until you are above $250,000 adjusted gross according to https://www.irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax

Really? here's the table I got from Forbes https://www.forbes.com/advisor/inve...lculated,and subtracting any related expenses.

When someone quotes the IRS, is your time better spent: (1) digging up what Forbes lead you to believe or (2) finding out what the foremost authority on Federal taxes said?