A growing number of Americans are finding themselves unexpectedly ensnared in the net investment income tax, or NIIT.
This tax emerged during the Obama administration and is intended to help fund the health care insurance reforms enacted into law by the Affordable Care Act of 2010, often called “Obamacare.”
When the NIIT was created, it applied to those with adjusted gross income (AGI) of more than $200,000 for most single filers or $250,000 for most married couples.
But those amounts were never indexed for inflation, meaning more people are subject to the tax as the years roll on. As The Wall Street Journal reports:
“As a result, NIIT revenue has more than tripled since the tax took effect in 2013, rising from $16 billion to more than $60 billion in 2021, according to the Internal Revenue Service’s latest data. Over that period the number of taxpayers owing it more than doubled, from about 3 million to about 7 million.”
The newspaper notes that had the NIIT income thresholds been indexed, they would now be around $264,000 for single people and $330,000 for married couples.
The net investment income tax is fairly small — just 3.8% — but it still is an unwelcome surprise to millions of Americans come tax time.
Despite the “investment” part of the NIIT’s official moniker, income that falls under this tax goes beyond capital gains, dividends and royalties. Income from interest on CDs and bank savings accounts also is subject to the NIIT.
There are a number of ways to avoid the NIIT, from purchasing municipal bonds (which are not subject the tax) to contributing to retirement accounts in a way that reduces your income and thus drops your AGI below the NIIT thresholds.
However, just because these strategies are available doesn’t necessarily mean they are right for you. If you are unsure about what steps you should take — if any — to try to avoid the NIIT, talk to a tax professional or stop by Money Talks News’ Solutions Center and find a great financial adviser.