The Net Investment Income Tax (NIIT),
How Much Do You Know?
We'll explain everything about the 3.8% surtax, the Net Investment Income Tax (NIIT). See if you're affected and learn how to reduce your tax burden with legal strategies.
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The Core Tax Benefit: Income Excluded from NIIT
The following types of income are not included in net investment income and are therefore not subject to the 3.8% tax.
Wages & Business Income
Salaries, wages, and income from active trade or business activities subject to self-employment tax.
Government Benefits
Most social security benefits, unemployment compensation, and other government transfer payments.
Qualified Retirement Accounts
Distributions from tax-advantaged retirement accounts such as 401(k)s, IRAs, and 403(b)s.
Tax-Exempt Income
Income that is exempt from regular income tax, such as interest from municipal bonds.
Sale of Primary Residence
Gain from the sale of a primary residence that is excluded from income by Section 121 (up to $500k for couples, $250k for single).
Other Income
Specific types of income such as alimony and life insurance proceeds are excluded.
Key Tax-Saving Strategies
You can significantly reduce your tax burden by meeting certain conditions.
Utilize Real Estate Professional Status
If you qualify as a "Real Estate Professional" for tax purposes and can prove you "materially participate" in your rental activities, the income from those rentals can be excluded from NIIT. Generally, participating for more than 500 hours per year is a safe harbor.
When selling an interest in a partnership or S-Corporation, if the entity was engaged in a non-passive business activity exempt from NIIT, the portion of the sales gain attributable to those business assets can be excluded from NIIT through an adjustment.
Net investment income is the amount after deducting related expenses. It's crucial to lower your taxable base by diligently deducting all related costs, such as investment interest expense, state income taxes attributable to investment income, advisory fees, and management costs.
How is the NIIT Calculated?
The NIIT applies a 3.8% tax rate to the lesser of the following two amounts.