The 3.8% NIIT applies to the lesser of your NII or your excess modified adjusted gross income (MAGI) above an annual threshold of $200,000 for single filers and $250,000 for joint filers. For example, net investment income includes interest and dividends, capital gains and gains from passive activities. Certain other items, However, IRA and qualified retirement plan distributions and income from an active business don’t count as NII. Accordingly, I recommend moving some of NII to other types of investment category.
1. Add municipality bond to your portfolio. The interest income from municipal bonds is generally exempt from all federal income taxes, including the NIIT.
2. Postpone large capital gains. This includes sales of securities that will produce short-term gains that would be taxed at higher ordinary income rates. I recommend consider waiting until a gain will qualify as lower-taxed long-term capital gain. The maximum federal long term capital gains tax rate is 20%, but most investors (married couples) whose income is less than $ 553,850 won’t pay more than 15%.
3. Create capital losses offsetting against capital gain. you may sell securities that will produce capital losses, which will be offsetting up to the amount of capital gain. Even without capital gain, the losses can offset up to $3,000 of ordinary income. Any excess loss is carried over to next year indefinitely until the loss is exhausted.
4. Arrange an installment sale. If proceeds are received over two or more years, only a portion of your gain from a real property sale is taxable in the year of the sale. The remainder is taxable in future years as sales proceeds are received. Thus, you benefit from tax deferral as well as reducing your NIIT exposure. By spreading out the taxable gain over several years, your total tax hit might be lower because more of the gain might be taxed at 15% instead of 20%.
5. Convert traditional IRA into Roth. There’s a one-time current taxable income hit that will increase your MAGI for the conversion year, but future qualified Roth IRA payouts are tax-exempt and won’t increase your MAGI in those years. Taxable traditional IRA distributions don’t count as NII, but they do increase your MAGI.
6. Swap real estate property through Section 1031 exchange. If the deal qualifies as a like-kind exchange under Section 1031 of the tax code, there’s no current tax liability except to the extent you receive “boot.” You must meet certain timing requirements. The section 1031 exchanges are limited to real properties.
7. Defer self-employment income. If you’re a self-employed individual, you might postpone taxable income to 2025 to lower your 2024 MAGI. You might also be able to accelerate some business deductions into this year, which would reduce your MAGI and self-employment tax bill.
Excerpt from Small Bigness tax letter.