Net Investment Income Tax

Net Investment Income Tax

The net investment income tax came into being on January 1, 2013 to defray some of the costs associated with the Affordable Care Act. It is assessed at a rate of 3.8% in addition to normal income taxes (capital gains and ordinary income taxes) that might apply to income generated by investments held in taxable investment accounts. Net investment income includes interest, dividends, capital gains, rents, royalties and non-qualified annuities. It does not include wages, unemployment compensation, Social Security benefits, alimony, municipal bond interest and most self-employment income.

Who pays net investment income taxes? Individuals with Modified Adjusted Gross Income* exceeding $200,000 and Married Filing Jointly taxpayers with MAGI above $250,000 are subject to this additional assessment. It must also be kept in mind that any income generated by the qualified sale of a personal residence will not be included in the calculation of MAGI. The net investment income tax is calculated and reported on Form 8960.

There are several strategies that investors can pursue to avoid the net investment income tax. Obviously, suppressing adjusted gross income below the aforementioned thresholds is effective. Investments in municipal bonds and municipal bond funds escape this assessment. Likewise, selecting growth stocks and ETF’s avoid this tax as well, since they usually pay few dividends and capital gains.  Other strategies involve maximizing contributions to tax protected accounts such as IRA’s and 401k’s and fully utilizing Roth IRA conversion opportunities. Lastly, the cash value build-up inside permanent life insurance policies is not affected by this tax.

If you would like to learn more about these and other wise financial planning moves, please contact us through our Level 5 Financial LLC website or via phone at 719-323-1240. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

*Modified Adjusted Gross Income is the form 1040 line 37 adjusted gross income with the income exclusions permitted by IRC section 911 added back to the total.  See for greater details.



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