If you have income coming in from investments, congratulations! However, this income may mean that you are subject to the net investment income tax (also referred to as the unearned income Medicare contribution tax).  While the effect of this tax is complicated in the way it impacts your total tax liability, an understanding of the basics will give you a foundation as you meet with your financial advisor.

What is net investment income?

Net investment income is before-tax income generated from investment assets (such as stocks, bonds and mutual funds), as well as loans, rents, and other investments.

How do I calculate net investment income tax?

You are only subject to net investment income tax if you have (a) investment income and (b) modified adjusted gross income (MAGI) that exceeds the threshold determined by the government:

  • $200,000 if your filing status is single or head of household
  • $250,000 if your filing status is married filing jointly or qualifying widow(er) with dependent child
  • $125,000 if your filing status is married filing separately

Your net investment income tax is equal to 3.8% of the lesser of either your net investment income or the excess of your MAGI over the threshold. For example, let’s imagine that you and your spouse file a joint tax return in which your net investment income is $50,000 and your MAGI is $270,000. The amount of your net investment income subject to this tax is equal to the lesser of (a) $50,000 or (b) the excess of $270,000 over $250,000, or $20,000. In this case, your net investment income tax is equal to $20,000 x 3.8%, or $760.

How can I lower my net investment income tax?

In any given year, your net investment income tax only applies to the lesser of your net investment income OR the amount of your MAGI that is over the threshold; you may be able to decrease your tax liability by controlling the timing of different elements of your financial portfolio, such as deductions that reduce your MAGI or sources of income. For example, you might increase your net investment income in a year when your MAGI is lower than the threshold. However, ordinary income and long-term capital gains tax rates are generally much higher than the 3.8% tax rate applicable to net investment income, so your planning for the net investment income tax should take into account its effect on your regular income tax.

Are you wondering about reducing your net investment income tax? Talk with a Farm Bureau financial advisor today about how you can plan for and manage your tax liability.  

 

Source:
From materials prepared by Broadridge Investor Communication Solutions, Inc. 

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. 

Neither the Company nor its agents or advisors give tax, accounting or legal advice. Consult your professional advisor in these areas.