Investment Income Tax

Last Updated on March 28, 2023

What is the Net Investment Income Tax (NIIT)?

The Net Investment Income Tax, or NIIT, applies to investment income. It includes dividends, capital gains, interest, and other investment-related income. This tax applies to individuals and estates.

Who pays the investment income?

Generally speaking, those with higher incomes pay the tax on this income. For individuals, those making more than $200,000 in modified adjusted gross income (MAGI), and joint filers with a MAGI of at least $250,000, you’ll acquire to pay this tax. In addition, estates and trusts with investment gains over $12,950 must pay taxes on investment.

Examples of Investment Income

1. Interest income from savings accounts and certificates of deposit is subject to the investment income.

2. Dividends from stocks and mutual funds are also subject to the tax on investment income.

3. Capital gains from selling stocks, mutual funds, or other investments are subject to the tax on income.

MAGI and IRS

The tax on investment income is related to the IRS in that the IRS is responsible for collecting and enforcing the investment income tax. They work with taxpayers to ensure they meet their obligations and file the correct paperwork. The tax on investment income is an essential source of revenue for the government, and the IRS is responsible for ensuring it is collected reasonably and efficiently.

The taxes on investment income apply to individuals with the IRS’s modified adjusted gross income (MAGI) of more than $200,000. This tax is 3.8% of the individual’s investment income. In addition, estates and trusts with investment incomes over $12,950 must pay the tax on investment income.

How do you avoid taxes?

There are a few ways to avoid taxes on income. One way is to invest in tax-exempt investments such as municipal bonds or charitable trusts. These offer a tax-free return on investment. Another way is to invest in assets not subject to capital gains tax, such as real estate or gold. You can offset your income with investment losses. If you have a net investment loss for the year, you can use it to reduce your taxable income.

Next Steps

Explore our tax planning tools to reduce taxable income with the right trust. Access more of our glossary terms to know more!

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