Strategies for Minimizing Net Investment Income Taxes

If you're subject to the 3.8 percent net investment income (NII) tax, there may be strategies you can employ to minimize or even eliminate the tax. NII includes many types of income, such as taxable interest, dividends, capital gains, rents and royalties, and certain passive business income.

The tax applies to you if your modified adjusted gross income (MAGI) is greater than $200,000 ($250,000 for married couples filing jointly; $125,000 for married filing separately). For most people, MAGI is equal to adjusted gross income (AGI). Your tax liability is equal to 3.8% of your NII or the amount by which your MAGI exceeds the threshold, whichever is less.

You can minimize your NII tax liability either by reducing your MAGI or by reducing your NII (some strategies do both). Here are a few examples:

•  Sell stocks or other securities at a loss to offset capital gains.
• Invest in tax-exempt municipal bonds (interest on these bonds is not considered NII),
• Max out contributions to IRAs and qualified plans (earnings are not considered NII).
• Invest in growth stocks that pay little or no dividends.
• Transfer investment-income-producing assets to loved ones who aren't subject to NII taxes.

As you consider these strategies, keep in mind that your investment decisions should not be motivated by tax-reduction alone. Be sure that any tax-planning moves you make are consistent with your overall wealth management goals.