Anyone familiar with Net Investment Income Tax?

[shaynaatl]

I'm just reading about this and had never heard of it.

www.investopedia.com/terms/n/netinvestmentincome.asp

Net investment income (NII), for tax purposes, is the total amount of money received from assets such as stocks, bonds, and mutual funds, minus related expenses.

NII may include interest income, dividend income, and capital gains. Whether this income, minus the expenses, is taxable is determined by the taxpayer's modified adjusted gross income (MAGI).

The article says the NII tax is 3.8%, and that the income cut-off is $250k for married filing jointly.

So does this mean, if your MAGI is over $250k, your interest income gets taxed an additional 3.8% on top of your tax bracket? If so, I think I need to start keeping less in my high-yield savings acct, and more in a taxable acct (which is taxed at capital gains %).

[archiethedragon]

Your assumption on how the tax is calculated is correct. But capital gains are also part of the calculation, so if your taxable account distributes capital gains, it will be subject to the 3.8% tax as well.

[simpsongal]

Yup - pretty sure they added that 3.8% with the Affordable Care Act. Ditto archie re capital gains too (assuming you held the stock long enough). Our dividends keep growing so we've had to get better about monitoring this.

[shaynaatl]

Ok thanks. We will have to reevaluate how much we keep in our Capital One savings acct, and perhaps move more to a taxable stock account (where we will get the capital gains tax % instead of ordinary income).

[jwright]

Yes, NIIT is part of the Affordable Care Act back in 2010. It is like self-employment tax, a separate calculation in addition to your regular income tax.

[sadlebred]

Out of curiosity, what is the dollar limit for them for a HYSA. I guarantee you that I am in no jeopardy of triggering it. Does anyone have a link to a good article about them?

[bee20]

sadlebred, it would only apply to your gains. So a 1000 HYSA making 5% interest would get $50 in interest in a year. At 3.8% tax that would be $1.90 in tax.

Note that interest is also already taxed at ordinary income rates, so you lose say, 22% to standard income tax ($11).

[sadlebred]

bee20 Thanks for the explanation!

[awkwardpenguin]

Mar 1, 2024 9:17:23 GMT -5 shaynaatl said:

Ok thanks. We will have to reevaluate how much we keep in our Capital One savings acct, and perhaps move more to a taxable stock account (where we will get the capital gains tax % instead of ordinary income).

Capital gains are also subject to the 3.8% tax.  Honestly I don't let small differences in taxes affect my asset allocation - I keep a certain amount in cash because it makes sense to do so and the rest is in a taxable stock account.  I do try to be tax efficient in my asset allocation but that's overall, not based on any one particular tax.