Close search field

Blog

All About Net Investment Income Tax

2021 Net Investment Income Tax Wooden puzzles with the image of money

When finalizing your client’s tax projection this year, don’t forget about their 2021 Net Investment Income Tax (NIIT) liability.

The NIIT is an additional 3.8% tax on your client’s investment earnings. The NIIT won’t affect every taxpayer, but if your client is a high earner, you should include a NIIT estimate in their projection so they are prepared — mentally and financially — for the additional liability.

What Is the Net Investment Income Tax?

The NIIT is a tax on earnings from investment activities net of deductible investment-related expenses (aka “net investment income”). Even though the definition is simple, calculating the NIIT can be confusing. Here are a few common questions practitioners and their clients have about the NIIT.

What is net investment income?

Net investment income is income earned from investment activities, like interest, rent and royalties. Actively earned income — like wages from a day job or income from a family business that your client operates — is not subject to the NIIT.

What are deductible investment expenses?

Investment expenses are costs your clients incur in investment-related activities. Deductible expenses include brokerage fees, advisory fees, tax preparation fees, fiduciary expenses and expenses related to rent and royalty activities.

Who is subject to the NIIT?

Individual taxpayers are subject to the NIIT when two things happen: (1) when they have net investment income, and (2) when their modified adjusted gross income (MAGI) exceeds the following thresholds:

Individual 2021
Married Filing Separately $125,000
Single $200,000
Head of Household $200,000
Married Filing Jointly $250,000
Qualifying Widower $250,000

Estates and trusts are also subject to the NIIT if they have (1) undistributed net investment income and (2) AGI over the following thresholds:

Trust/Estate
Tax Year AGI Threshold
2019 $12,750
2020 $12,950
2021 $13,050

How is the NIIT calculated?

To calculate the NIIT for your client, you’ll need to collect investment income, investment expenses and MAGI.

The tax is calculated as 3.8% of the lesser of (1) net investment income, and (2) the amount at which your client’s MAGI exceeds the applicable threshold. Let’s look at two examples:

Example 1:

Your client is single and has investment income of $68,000, investment expenses of $13,000 and MAGI of $270,000. Your client’s NIIT liability would be $2,090.

Example 2:

Your client is single and has investment income of $22,000, investment expenses of $2,000 and MAGI of $210,000. Your client’s NIIT liability would be $380.

Why Haven’t I Heard of the NIIT?

If you aren’t familiar with the NIIT, it may be because it is a relatively new tax. It went into effect in 2013, a few years after it was passed. It was passed in 2010 as part of the Health Care and Education Reconciliation Act, which was a law that amended the Affordable Care Act (ACA).

The NIIT is a permanent addition to our tax code, but its close ties with the ACA place it in a precarious position. The ACA has been taken to court many times, most recently in the Supreme Court Case California v. Texas. The judgment issued in this case upheld the ACA, but the challenges to the ACA are likely to continue. There is not going to be a net investment income tax repeal in 2021, but if the ACA is repealed in the future, it is highly likely the NIIT would also be repealed.

How Do I Report the NIIT?

The Net Investment Income Tax form for individuals, trusts, and estates is Form 8960. The form calculates your client’s NIIT liability, which will then flow to Form 1040 (or applicable tax form) along with your client’s income tax liability.

What Are Some Strategies for Managing the NIIT?

Your client can shrink their NIIT liability by (1) reducing the amount of investment income they report, and/or (2) reducing their MAGI. They could do this in a few ways:

Donate appreciated securities to charitable organizations.

By donating appreciated stock to a charitable organization, your client would be foregoing capital gain recognition and gaining a charitable deduction. But this technique will only work if your clients itemize their deductions.

Invest in municipal bonds.

Interest earned from municipal bonds is tax exempt and therefore not subject to the NIIT.

Maximize contributions to qualified retirement accounts.

Growth within qualified retirement accounts is tax deferred until withdrawal. This not only reduces investment income, but it also allows your clients to take a current-year deduction for contributions, which will reduce their MAGI. Just remember that the traditional IRA deduction may be limited if their retirement plan is sponsored by their employer.

But the most important thing to remember is that, like income tax, your clients must pay their NIIT liability equitably throughout the year, either through employer withholdings or as estimated taxes. In our Corvee Tax Planning software, we include a NIIT calculation that you can use to help your clients plan for the year ahead. If you want to see how impactful the NIIT can be to your clients’ tax liability, we can walk you through an example that includes the NIIT. Reach out to us today and request a demo.

Request a Demo with Corvee Tax Planning software

Want to Learn More?

Please fill out the form below.

  • This field is for validation purposes and should be left unchanged.

Interested in Partnering?

Fill out the form below, and we’ll be in touch.

Want to Learn More?

Please fill out the form below.

  • This field is for validation purposes and should be left unchanged.

Want to Learn More?

Please fill out the form below.

  • This field is for validation purposes and should be left unchanged.

Want to Learn More?

Please fill out the form below.

Schedule Your Free Demo

  • Hidden
  • This field is for validation purposes and should be left unchanged.

Corvee has been recognized by Inc. magazine’s annual Inc. 5000 list as one of the nation’s fastest-growing private companies.