Q.: You talked about in a column that there’s a 3.8% “Web Funding Earnings Tax.” Is that the millionaire tax I maintain listening to about Congress contemplating?
–Keith in Tampa
A.: Keith, no. The Web Funding Earnings Tax (NIIT) has nothing to do with having a million-dollar web price and it comes into play lengthy earlier than earnings reaches 1,000,000. The NIIT is triggered as soon as Modified Adjusted Gross Earnings (MAGI) reaches $200,000 for a single filer, $250,000 for a joint filer, $125,000 for a married individual submitting individually. For a belief or property, NIIT will apply to the lesser of undistributed web funding earnings (principally earnings not paid out to a beneficiary) or Adjusted Gross Earnings (“AGI”) if the belief/property is within the prime marginal tax bracket which begins at solely $13,050.
The three.8% tax applies to the lesser of the Web Funding Earnings or the quantity by which MAGI exceeds the edge. For instance, if a pair submitting a joint return has a MAGI of $300,000 and Web Funding Earnings of $30,000, they exceed the edge by $50,000 and the $30,000 is topic to $1,140 of tax ($30,000 X 3.8%). If a second couple additionally had $300,000 of MAGI however $80,000 was Web Funding Earnings, their tax could be $1,900 ($50,000 X 3.8%).
I gained’t record each part of MAGI or Web Funding Earnings right here, however I’ll provide the highlights as of 2021. You possibly can observe the main points by operating by Type 8960 and its directions. This stuff for MAGI and Web Funding Earnings will not be set in stone. As I write this, there are proposals in Congress so as to add extra objects to the record of Web Funding Earnings.
The most typical parts of MAGI embody:
- Wages, taxable Social Safety, taxable alimony, compensation (together with deferred compensation)
- Taxable distributions from IRAs, Roth IRAs, retirement plans, 529 plans, HSAs and nonqualified annuities
- Taxable curiosity and dividends
- Capital positive factors and taxable positive factors from the sale of different property
- Rents and royalties
Web Funding Earnings contains amongst different issues:
- Capital positive factors
- Curiosity and dividends
- Rents and royalties
- Nonqualified annuity distributions
- Earnings from a commerce or enterprise thought-about a passive exercise
Web Funding Earnings does NOT embody:
- Wages, taxable Social Safety, taxable alimony, deferred compensation, and self-employment earnings topic to self-employment taxes
- Pensions or taxable distributions from IRAs, Roth IRAs, retirement plans
- Tax exempt earnings equivalent to municipal bond curiosity, exempted positive factors from the sale of a main residence and life insurance coverage demise advantages
- Earnings from a commerce or enterprise not thought-about a passive exercise
One consideration about that is if you’re close to the thresholds talked about earlier or considering rising your MAGI over the edge as a consequence of one thing like an IRA distribution or Roth conversion, it may be a worthwhile train to judge how these issues could topic your funding earnings to the NIIT.
For example, taxable quantities attributable to a Roth conversion will not be included in Web Funding Earnings but when the conversion pushes you above the MAGI threshold, it’s possible you’ll topic your funding earnings to the extra tax.
When you’ve got a query for Dan, please electronic mail him with “MarketWatch Q&A” on the topic line. Dan Moisand is a monetary planner at Moisand Fitzgerald Tamayo serving shoppers nationwide from workplaces in Orlando, Melbourne, and Tampa Florida. His feedback are for informational functions solely and will not be an alternative to personalised recommendation. Seek the advice of your