Reflection No. 44

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Taxes are everywhere and just when you think you’ve got it all figured out, it feels like there’s a new way to get taxed.

This week’s Reflection takes a closer look at the Net Investment Income Tax (NIIT), covers some common money misconceptions, and highlights the importance of being intentional with your money.

Three Quick Hits:

• Article: Money Misconceptions

  Believing common money misconceptions can seriously hurt your financial health. One of the biggest? Waiting to invest until the stock market “cools off.” Trying to time the market is a fool’s game. If you sit on the sidelines waiting for the “perfect” moment, you might find yourself never investing at all. Consistency and time in the market will almost always serve you better than trying to predict its every move.

• Tip: Be intentional about how you use financial windfalls. Treat yourself with no more than 10% of the windfall and use the rest to improve your financial life. 

• Quote: “The biggest risk is not knowing what you are doing.” - Peter Bernstein 

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Two Questions:

• Why is it easier to spend money than to save money? 

• Where do you hope to be financially in five years? 

REFLECTION No. 44: Net Investment Income Tax

I - Issue: What’s the net investment income tax (NIIT)?

R - Rule: NIIT is an additional 3.8% tax on certain investment income for taxpayers having a modified adjusted gross income (MAGI) over a certain threshold. 

A - Analysis: You, as an investor, may owe an additional 3.8% tax if you have investment income and your modified adjusted gross income exceeds a certain threshold. 

Investment income includes a host of things but most commonly means capital gains and dividends. The MAGI threshold is $ 200,000 for single filers, $ 250,000 for married filing jointly, and $ 125,000 for married filing separately. These thresholds aren’t indexed for inflation, and this is one of those rare instances where being married could cost you more in taxes.

If you owe NIIT, the amount you owe will be 3.8% of your net investment income or the amount of your MAGI that exceeds the threshold, whichever is less. 

C - Conclusion: Net Investment Income Tax is another tax to be aware of. However, it’s unlikely that most of us will be subject to this tax since our income will not exceed the threshold amounts in our retirement years when we are most likely to recognize capital gains.