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Net Investment Income Tax Strategies

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  • Net Investment Income Tax Strategies

    Alright, so going through the taxes (always a fun time!) and while going through the actual forms (use TurboTax but then I like to go through the forms to really understand how things are calculated).

    We sold some stock (long-term) and when I did a couple "what if" scenarios in TurboTax I was surprised the tax was coming out much higher than 15%. Going through the forms I found a "new" tax that we hit called Net Investment Income Tax (3.8% on net investments! -- ouch!). Apparently, it kicks in after hitting $250K (married). It came out in 2013 and we didn't see it before cause we had a kid so we both took time off the last two years.

    Doing some research doesn't seem you can do much to avoid it unless you drop your income. We're dual income both W2s so don't get much tax break on any self-employed benefits . On one side I read somewhere it's only the top 2% that actually get hit with this, so guess we're doing something right to be part of that "elite" group --- bittersweet!

    Curious what other's in the same boat do to try to minimize this? We do the whole 401k max and Roth back-door, so it's really what we do in the taxable brokerage accounts. Could load up on tax-exempt muni. I already have a healthy amount of CA munis which are decent returns. Outside of that everything seems to be fair game: qualified dividends, long-term, any interest .

    Seems real estate investing/rental can help but it's really only DEFERRED since the offset amount will eventually get recaptured and that would be subject to NIIT . So still can't really win.

    Guess on the bright side it's still better than being taxed at ordinary income rate (our marginal is 33% plus 10.5% state so looking at 43.5% which always makes me want to cry )...  this is why when they offer the extra graveyard shift at $1K (which goes into the W2), not really worth it .

    Just curious what others in the same boat do.

     

     

     

  • #2
    LTCG (and qualified dividends) will be taxed at 15% (or 20% if you're in the top tax bracket), + State Income Tax (in most cases)+ 3.8% medicare surtax.

    I only sell in the taxable account if I am tax loss harvesting.  Otherwise, it's all buy-and-hold.  No actively managed funds, which will generate more taxable income.  Passive funds like S&P 500 and Total Stock Market have dividends of about 2% per year, all qualified.  Tax drag on the account for high earners with be in a range of about 0.4% to 0.7% depending on your income and state.  That's 20% to 35% of the 2% dividend, if that makes sense.  Some people like dividend stocks.  Dividends aren't so good for high earners.

    Another way to reduce taxes is to invest in stocks and funds that have small or no dividend.  Growth funds, or Berkshire Hathaway stock (0 dividend) would fit the bill if it fits into your asset allocation.  If not, this strategy might be letting the tax tail wag the dog.

    Best -PoF

     

     

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    • #3




      Alright, so going through the taxes (always a fun time!) and while going through the actual forms (use TurboTax but then I like to go through the forms to really understand how things are calculated).

      We sold some stock (long-term) and when I did a couple “what if” scenarios in TurboTax I was surprised the tax was coming out much higher than 15%. Going through the forms I found a “new” tax that we hit called Net Investment Income Tax (3.8% on net investments! — ouch!). Apparently, it kicks in after hitting $250K (married). It came out in 2013 and we didn’t see it before cause we had a kid so we both took time off the last two years.

      Doing some research doesn’t seem you can do much to avoid it unless you drop your income. We’re dual income both W2s so don’t get much tax break on any self-employed benefits . On one side I read somewhere it’s only the top 2% that actually get hit with this, so guess we’re doing something right to be part of that “elite” group — bittersweet!

      Curious what other’s in the same boat do to try to minimize this? We do the whole 401k max and Roth back-door, so it’s really what we do in the taxable brokerage accounts. Could load up on tax-exempt muni. I already have a healthy amount of CA munis which are decent returns. Outside of that everything seems to be fair game: qualified dividends, long-term, any interest .

      Seems real estate investing/rental can help but it’s really only DEFERRED since the offset amount will eventually get recaptured and that would be subject to NIIT . So still can’t really win.

      Guess on the bright side it’s still better than being taxed at ordinary income rate (our marginal is 33% plus 10.5% state so looking at 43.5% which always makes me want to cry <img src=" /> )…  this is why when they offer the extra graveyard shift at $1K (which goes into the W2), not really worth it .

      Just curious what others in the same boat do.

       

       

       
      Click to expand...


      You've just met the evil rich tax. You're right, nothing much you can do but the name of the game is to 1) grow your wealth as much as possible 2) paying the least amount of taxes possible. If you are not appropriately diversified, do it. If the ideas POF puts forth are apples to apples with an appropriately diversified portfolio, you need to go that route. With Ca munis, you are letting the tail wag the dog - do you own them just to save tax or are they a component of your long-term plan to grow your wealth for meeting specific goals? What percentage of your portfolio is allocated to them and how did you determine the appropriate %? Just a few of the questions to be asking yourself. You should choose the strategy that has the highest long-term growth potential. If another strategy that saves in taxes is apples to apples, then choose it.
      Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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      • #4
        I forgot to mention that the taxes on LTCG and qualified dividends can be a temporary hassle.

        If you retire in the 15% tax bracket with a properly structured portfolio, you can pay zero federal income tax and have six figures in annual spending.

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        • #5
          make less money

          either way, you come out ahead.

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