The 'You-Make-A-Lot-of-Money Tax' Hits More Americans

[question everything]

Many Americans don’t know Uncle Sam has an extra tax on investment income for higher earners—at least until they owe it. Now more people are owing it, thanks to inflation and higher yields on bank accounts and bonds.

This levy is called the net investment income tax, or NIIT for short. It’s a 3.8% surtax on a filer’s income from sources like interest, dividends and capital gains that applies if adjusted gross income, or AGI, is above $200,000 for most single filers or $250,000 for most married couples. It affects one-time spikes as well as recurring income, so taxpayers who typically earn less can owe it on a windfall.

(snip)

And the NIIT’s reach is expanding. When lawmakers enacted it to help fund the Obamacare health-coverage expansion, they chose not to adjust the $200,000/$250,000 thresholds for inflation to collect more tax.

As a result, NIIT revenue has more than tripled since the tax took effect in 2013, rising from $16 billion to more than $60 billion in 2021, according to the Internal Revenue Service’s latest data. Over that period the number of taxpayers owing it more than doubled, from about 3 million to about 7 million. Had the $200,000/$250,000 thresholds been indexed for inflation, they would be closer to $264,000 and $330,000.

(snip)

The 3.8% surtax applies to net capital gains on asset sales (including cryptocurrency), dividends, interest (including on CDs and bank accounts) and royalties, among other things. It also applies to net gains on the sale of a home above the exemption of $250,000 for single filers and $500,000 for joint filers. Rental income can be subject to the tax as well, unless it’s from an actively managed real-estate business.

More..

https://archive.is/R1JSj#selection-156.0-156.1

[XanaDUer2]

1. I'm on free Obamacare

So, thanks

[intrepidity]

2. The tax code needs to be completely overhauled

I don't see how or when that happens, but it is ridiculous.

[A HERETIC I AM]

3. Good.

3.8% tax on $100,000 income from an investment that resulted in that $100k gain is $3,800.

$38,000 on a million.

Oh my, how could I possibly survive with the paltry $962,000 I made in profit selling that Bond/ETF/Muni/Stock position?

I appreciate you posting the article, but like many from this source, it’s a ‘THE SKY IS FALLING” kind of thing that only billionaires really give a fuck about.

How many people do you know that are going to be seriously affected by this tax?

And even if it is on top of the highest marginal rate, I find it difficult to garner sympathy for people who might find this sort of thing a concern.

If you made a million dollars selling an investment, and the government taxes you $40,000 on that million, YOU STILL MADE MORE IN A YEAR than most Americans make in 10.

Sorry to rant, but not sorry,

[Auggie]

4. +1,000,000 ...

no pun intended

[multigraincracker]

7. I'm with you.

Have no problem with my taxes. Really wish I was in a higher bracket be thrilled to pay a couple million and be in that bracket.
In the last year our income has doubled and we are still spending the same amount.

[question everything]

9. Her columns are about tax issues that I often post here

The idea is for the ones affected to consider them.

But I do agree with the problem of not indexing for inflation. Our long term premiums continue to increase. We itemize them but there is a limit on how much one is allowed and these values have not been indexed, too.

Perhaps I should no longer post these columns. I thought that some found the information of interest.

[progree]

10. Yes, the not inflation indexing is a ticking time bomb. Just like Social Security benefits taxation

Where the 25k$ and 34k$ thresholds for taxation set back in 1982 or wherever it was were never indexed for inflation. Back then those only nabbed some people in the upper middle class and above. Now pretty much everyone has much or most of their social security benefits taxed -- a benefit we already paid payroll taxes to create.

I'm a long long way from getting hit by the 3.8% NIST tax.

But I've been hit by the Medicare IRMAA part B and D premium surcharges once so far. Withdrawals from traditional IRAs plus selling some stock bumped me up in 2021 taxes IIRC. (Fortunately, unlike the NIST and the Social Security taxation thresholds, the Medicare premium surcharges are inflation-adjusted).

Social Security benefits taxation and the Medicare premium surcharges (and the NIST adder for the $200k+ folks) are examples of how one's actual marginal tax rate can be considerably higher than what are in shown in the conventional tax tables.

So can a mix of regular income and capital gains cause an actual bump up in marginal rates. Someone can be in the 12% or 22% tax brackets and earn a little extra income from work and end up actually having that extra taxed at 27% or 37% (12%+15% or 22%+15% respectively) because, besides being taxed at the 12% or 22% ordinary tax, it also pushes more of one's capital gains "up the stack" to where more of it is taxed at the 15% CG rate. Plus state income taxes of course for those of us in Minnesota and many other states.

There are some segments of DU that think anybody with any stocks at all is "rich", and having one's 401k portfolio being demolished by simultaneous stock market and bond market plunges as a "first world problem" (which is true). Or having one's annuity's purchasing power, like mine, being devastated by inflation. So don't let the outrage bother you.

With the core inflation rates stuck at nearly 5%, it would only take 14 years for prices to double and 28 years to quadruple -- meaning that effectively the non-inflation-adjustable thresholds would be effectively cut in half in 14 year or down to a quarter in 28 years. So what began as a rich person's tax becomes a mid-middle income tax in a generation.

I much appreciate your postings. There are certain kinds of postings here that I don't appreciate (not talking about any from you), but I just try to keep my yap shut or at least be gentle about them because we don't get all that much traffic here.

Edited to add - Another ticking time bomb is that tax brackets are being adjusted by the CHAINED CPI, which rises more slowly than the regular CPI (that little fuck-you provision is thanks to the Trump "tax cuts" that some people ballyhoo here). So there will in effect be considerable tax bracket creep in the years to come. And this is "permanent", it doesn't go away at the end of 2025 like most of the other personal income Trump tax changes .

[progree]

11. In addition to the 3.8%, the person would pay 15% or 20% capital gain tax

3.8% tax on $100,000 income from an investment that resulted in that $100k gain is $3,800.

$38,000 on a million.

Oh my, how could I possibly survive with the paltry $962,000 I made in profit selling that Bond/ETF/Muni/Stock position?

On the $1 million gain, there would be a a 15% capital gains tax rate on some of it, and 20% on the rest of it, lets say about half at 15% and half at 20%, or $175,000. And then $38,000 for the 3.8% NIIT tax, for a total tax of $213,000. Leaving $787,000 after taxes.

Yes, that 21.3% overall rate is well less than some middle class worker paying 22% regular tax rate on their paycheck plus 7.65% payroll tax = 29.65%. And some count the 7.65% payroll tax that the employer pays as mostly or even entirely being paid by the worker on the theory that under competitive market conditions, that's money the employer would otherwise pay the worker. Whichever, a total of 37.3% in taxes is paid on that paycheck (22% + 7.65% + 7.65%).

I don't want people to think that the 3.8% NIIT tax is a replacement for the capital gains tax, but rather it is an adder to it. And yes, it should be a lot higher.

[MichMan]

5. Is this in addition to normal income tax rates on it?

[progree]

6. Yes. /nt

[dpibel]

8. "Hits more Americans," but still not many

According to the article (from that reliable source of all information liberal, the Wall Street Journal), this punitive tax on innocent middle-class taxpayers applied to around 7 MILLION!!!!11!1! tax returns in 2021.

That's about 4% of all the tax returns filed.

So WATCH OUT because you, too, might be in danger of slipping into that top 4% and then you will be nailed.

The tragic examples used in the article are:

A couple who make a mere $245,000 in a year and, due to this onerous, sneaky tax, must pay an additional THREE HUNDRED EIGHTY AMERICAN DOLLARS in taxes.

That made me weep until I read the next paragraph which tells of a single man with an income of merely $230,000 who would be nailed for $1,140.

If these people were not hypothetical examples, I'm sure all of you would join me in starting a GoFundMe for them.

We are truly talking first world problems here.