Updated: Jan 4
What is the NIIT you say? Remember Obamacare? There was a nasty provision to play Robin Hood in that bill. It forces “the rich” to pay for health insurance premiums for “the poor.” It’s computed by figuring your “Modified Adjusted Gross Income” (which is usually the same as your regular Adjusted Gross Income, but sometimes it is different). If your MAGI is higher than $200,000 ($250,000 for married folks…don’t even get me started on how unfair that is…), then certain types of income (unearned, like interest, dividends, capital gains, certain rents, etc.) are taxed at an additional tax rate of 3.8% over and above regular Federal Income Tax on those items. Ouch!
So how can a person reduce or eliminate this “Obamacare Tax” called NIIT (Net Investment Income Tax).
One idea is to replace enough of your interest income with Muni-Bond interest to lower your MAGI below that magic NIIT threshold. BONUS. Muni-bond interest is generally exempt from all federal income tax, including Obamacare. With rising interest rates, Munis are starting to pay some decent amounts. Currently approaching 4%.
Another way to reduce or eliminate the NIIT, would be to postpone Capital Gains or match them up with harvested Capital Losses. Example: You sold some Real Estate at a favorable profit, and this year the Stock Market is down, so consider selling some poor performing stocks and use the losses to offset the real estate capital gain. If you can postpone the sale of that real estate into 2023, even better. Another way to lower the NIIT impact on Capital Gain income, is to have the proceeds of a sale of real estate paid out over more than one year. (We like to call that an “Installment Sale.”) Thus, the amount of Capital Gain reported each year might drop you below that dreaded NIIT threshold.
An idea I have already suggested in earlier columns, is to convert some of your IRA into a ROTH. On top of the already mentioned benefit of realizing future increases in the Stock Market tax free, it can reduce the amount of future RMD (Required Minimum Distribution) in your retirement years (when you usually have less earned income and more unearned income), which might be enough to not push you over the NIIT threshold.
Finally, consider doing Tax Free Exchanges of real estate (called Section 2031) if you want to sell any real estate but intend to reinvest it in different real estate. There are some really strict rules on how to do a Section 1031 Exchange correctly, so consult a tax professional before beginning one.
There you have it. Now go out there and keep Robin Hood off your back.
Have you heard? Prov 22:7 says, “The rich and the poor meet together; the LORD is the Maker of them all.”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459. On the web at BullisAndCo.com Also on Facebook.