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So probably all of you with big wallets have discovered this years ago, but I just tripped over the NIIT for the very first time. Like all good engineers with an interest in personal finance, I have spreadsheets of my spreadsheets. I have been working the last few years to do some ‘bracket bumping’ with my Roth conversions and I thought this year I had it totally dialed in. Like down to the dollar. I put all of my numbers into freetaxusa.com and zipped right along… expecting to come out with a $349 refund. Uh. $223?! Hold the phone. Whaaaat?! And there it is… Line 23… Other Taxes … Schedule 2 Line 12… Net Investment Income Tax $126. *splat*
My AI (who remained very calm thru this high drama) explained to me that the NIIT is 3.8% of either 1) your net investment income for the year or 2) the amount of your MAGI above the threshold – whichever is lower. Here I go… adding some new cells to my beloved spreadsheet! For goodness sake.
So… the 24% tax bracket for a single goddess like myself caps off at $197,300 + $15,750 standard deduction for 2025… so $213,050. With Roth conversions, it LOOKS like my income is in that range but now we have this new wrinkle in that $13.050 of that is not REALLY in the 24% bracket and it’s not in the 32% tax bracket… it’s kind of in this weird 27.8% pseudo bracket [if $13,050 is lower than my net investment income.] Another interesting fact is NIIT was put into effect in 2013 and the threshold has not changed since. In 2013, $200,000 was well into the 33% tax bracket. In 2026, the 24% tax bracket is projected to cap off at $237,400 ($221,300 + $16,100)… Bringing the nifty NIIT into the picture for more and more people. Surprise!!
At the top of the 24% bracket, the NIIT would have been 13,050 x 3.8%, so $496. Luckily for me (or not) I have very little net investment income as most of my savings are in retirement accounts. So… my missing $126 was 3.8% of my CDs and interest on savings this year. Making me wonder if all of that work I did to research and move my emergency fund from one bank to another to get the higher rate last year was just flushed right down the ol’ crapper. Hm.
Anyways, mystery solved. Lesson learned. I guess. Not really sure I will change anything going forward but at least next year I will not be taken by surprise.
When I see an Excel spreadsheet, I cringe! For years, prior to computers, we used a manual spreadsheet known as a pegboard. It kept records of the daily debits and credits and transferred to weekly and monthly accounting. There was many a time I had to put those little numbers in those little tiny boxes. In hiring someone to place those little numbers in the confines of those little boxes, I was told that they were either good at that, or, being a people person and not usually both! There seemed to be some truth to that opinion over the years. I thought I did well putting those little numbers in those little boxes and I had to check those numbers at the end of the day, week, and month.. Computers solved a lot of those problems as long as the entry person got the numbers right.
Today I’m happy that’s all in the past and don’t want deal with the confines of those little boxes, even if the computer does it for me! Oh, did I mention that I have an engineering degree and a dental degree? I guess I’ve become a people person. LOL!
Thanks to Ormonde for mentioning Line 9 on Form 8960. This will be my first year taking Form 8960 to the tax prom, which I believe starts at 10:40. I’m sure we’ll have a good time dancing with the other forms. BTW, I understand that νιιτ is Greek for “big wallet” – or does it mean “fat wedding”?
Including investment expenses on Line 9 – such as interest, state taxes, and even foreign taxes – is a good suggestion. But unless these deductions result in a net investment income on Line 12 that’s lower than the amount on Line 15 (i.e., MAGI minus a threshold, e.g., $200k for Single), there’s no benefit to determining those investment expenses.
As Ormonde says, if you reduce the investment income, it won’t matter unless it affects how much sticks up above the threshold amount.
I use complicated spreadsheets at work including cleaning up data from multiple sources, but when it comes to taxes, I.dump everything at the accountant’s office.
I found this article fascinating, but something I’m completely unwilling to deal with myself.
Thanks, I am a NIIT wit too. I have that expense, but paid very little attention to it, as it is calculated via my Turbo Tax. So thanks again for the enlightenment. There are so many tax rules I contend no one on earth knows them all, that is why I just put in the numbers, review and hope all is correct. I do count on Turbo Tax.
In tax estimating, I estimate. Missing a marginal breakpoint is usually a marginal error. I also plan without including any traditional IRA contributions so I have a (married older) $16k margin. And with these things I also comfort myself :-).
Did you adjust for state taxes in line 9b?
Hi Ormonde. What is this thing ‘state tax’?! ;). Just teasing. I am in Florida but I’d still like to learn. Are you saying people that pay state tax might not have this NIIT assessed??
You can reduce the amount subject to NII. How much state tax did you pay on your investment income? OK, reduce your investment income by that amount. Now, how much sticks up above the $200K line?
That’s the basic idea – read the IRS publication for the full explanation.
Yet another non-inflation-indexed threshold. Like for how much Social Security is taxed, and the exclusions for home sales. What others are there?
Well we have this deficit thing but I hear you
The 0.9% tax on earned income above $250,000 called the “Additional Medicare Tax.” Another kick in the pants that gets very little attention.
Heidi, thanks for your post and your wit. I look forward to more of both in the future.
I’m beginning to wonder how I got by all these years without a spreadsheet. 😎. Is there comfort or joy in a spreadsheet or both?
RQ,
You have a system that works for you 😉
Apparently so. I can’t think of any information I want or need that I can’t obtain when I want it with a few clicks on my iPad to my bank, credit card company or Fidelity.
Two of my sons are diligent and serious spreadsheet users though. Maybe it’s a generational thing.
I probably posted this before …
More fiction has been written in Excel than in Word.
I use my spreadsheet for tax planning to make sure I do any estimated tax payments. Also, it prevented me from submitting my TT return this year. I could see my AGI was too low in TT. Thanks to the help of TT phone support, the error was fixed and I submitted my return.
Unlike in my working days, I have income coming from dividends, interest, SS, my pension and sometimes other sources. The spreadsheet is necessary to make sure I withhold enough money to avoid any interest penalties. FWIW, I make less income, but it is definitely more complicated.
I’ll “one up” your “how did I get by all these years without a spreadsheet” with the fact that I have no idea what a spreadsheet it. And I’m ok with it
Perhaps you can ask your favorite AI/large language model to explain it ;-).
Both!
My financial spreadsheets give me GREAT comfort…. using modest IRA earnings forecasts with my spreadsheet workbook that has a yearly spreadsheets for 2011-2044 (the end of our retirement planning period), I can essentially see the future with reasonable accuracy!
Dave
“See the future” I gotta get me one of those. 😁
Not based on your assumptions for the future is it? In any case good luck and accuracy.
Spreadsheets satisfy the creative in the making, the engineer in the required understanding, the control freak in the unarguable concrete results and the basic human need to have digital proof there we’re so very smart and pretty. Hahaha. Definitely comfort and joy!!!
Concrete results, proof? Like a budget?😱
Comfort and joy I get, but you can get that from a puppy too.
People with concrete ideas are mixed up and set in their ways. (Only contribution I can make to this discussion.)
I share your love of spreadsheets but you win in humor. Never underestimate an engineer’s ability to write!
Shucks. Thanks S. Scary little glimpse into how my mind works… Hahahaha
I enjoy how your mind works! We need more humor in this world!!
Michael Perry, no relation to me, had a good HD article in December 2023 where he noted –
We have to be cognizant of the NIIT in realizing capital gains. Unlike Roth conversions, dividends and capital gains are subject to the NIIT and its additional 3.8% tax. If we did both, while the Roth conversion amount itself wouldn’t be subject to the NIIT, it would count toward the $250,000 threshold beyond which dividends and capital gains would get hit with the NIIT.
A key take away of both your post and Michael’s is that while a Roth conversion amount itself wouldn’t be subject to the NIIT, the Roth conversion income would count toward the NIIT threshold.
For any matters I did not properly consider in my tax planning I also like to use a current tax calculator in addition to my own calculations during my tax planning. In recent years I have used the free calculator at Dinkytown.net in my planning.
I also do not like it when my planned tax is not equal to my final tax. As a back up position I typically make safe harbor payments through a combination of ES payments and FWT based on my prior year tax.
I want to pay my tax but do not want to leave a tip.
Best, Bill
dinkytown.net’s tax calculator for the current year looks very nice but uses last year‘s tax rates. 🙁
I agree that it would be great if Dinkytown let you select the tax year to use. I usually see their calculator tax year updated to the current year late March to early April. Of course new tax legislation can change all your early in the year planning as occurred 7/4/2025 for tax year 2025 with the signing of OBBBA on 7/4/2025 and also the typical changes in your own tax circumstances. A March or April update has been soon enough for my planning purposes.
I have noticed that, as well. Also, my tax situation is too complex for dinkytown. I am getting a better understanding of my taxes using excel1040.com. They have 2025 & 2026 models.
I am also a big fan of excel1040.com. I use that every year to figure out my Roth conversion by running a variety of amounts through the spreadsheet and looking at the impact on my forecasted total tax. That allows me to get a pretty accurate view of the tax on just the conversion and marginal rates on the increments of the conversion that includes all of the tax return nuances. Very handy tool!
A very fair observation. I am working hard to make my personal financial tax planning simpler as I age so it will less of a future burden on family who follows my decisions. Before I retired as a CPA (mostly tax) I had used most of the major tax software providers tax projection software that was incorporated into their tax platforms which could give great insight to a tax projection only to default to having a safe harbor payment being made.
I am happy that you have found a tax planning tool that works well for you.
William, I am with you. Simpler is better. Once I am done with self-employment and Roth conversions, maybe in two years, I can “set it and forget it.”
I can relate to the sentiment. In my case it will be simplified by getting beyond restricted stock units and Roth conversions.