How does NIIT impact passive income?

Most people don’t know what NIIT or Net Investment Income Tax is. The big reason is that most people don’t qualify for it. Don’t worry it’s a good thing if you don’t qualify. In the post, we talk talk about a few things.

Note: Please remember, this site doesn’t provide financial or tax advice. I write these post to mainly educate. Hopefully, you read what I’m sharing, interrogate it, think critically and speak with a professional for advice. If you need help finding a professional, I can definite help with that. Please ask if this is the case.

What is NIIT?

NIIT is a federal tax in the United States for individuals, estates, and trusts that have net investment income or modified adjusted gross income above applicable threshold amounts. You can learn about the thresholds here. If you, your estate, or trust exceeds the threshold you have to pay a 3.8% tax. The tax is applied on a yearly basis.

When is NIIT applied to my income?

As I said before, NIIT doesn’t apply to many people. Let’s look at an example. Let’s say you’re single and your net investment income or modified adjusted gross income is $200,000. You exceed the $150,000 threshold. Therefore the NIIT tax is in effect.

How do you pay NIIT?

It’s pretty straight forward, you have to fill out Form 8960 on your federal tax return. Most tax software and services make this pretty straight forward and easy to tackle. If want to learn more about Form 8960, the IRS provides this information.

Why doesn’t NIIT apply to most people?

Many people have investment income. The truth is that not too many people have investment income that generates hundreds of thousands of dollars a year. Some people may say this is a rich person’s problem. Well, they’re kind of right. A wise person one said, you can’t avoid death and taxes. This is definitely true with NIIT.

Are there scenarios I should be aware of?

One scenario comes to mind. Let’s say in year 1 you generate income very close to your threshold and in year 2 you generate income slightly over your threshold. You may have more dollars in your pocket from year 1 versus year 2 because of the tax impact. I know it’s a bit of a head scratcher, but those are the breaks. I would definitely keep that in mind when planning for the future and measuring the tax impact our your investments.

Raising Awareness

You may have found this site after hearing the acronym of NIIT from your accountant or CPA. If you did or like this post, can you share it? I would greatly appreciate it. Thanks.

The Origin of the NIIT

I came across this video. The NIIT was introduced to help fund the Affordable Care Act. I personally knew about NIIT but didn’t know the origin until I found this video on Youtube. I recommend checking out out.

By Eliot Pearson

I love to talk about side hustles and gigs, blockchain, and technology. Feel free to connect with me

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