FREE NEWSLETTER
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.