NIIT applies to:
- Rental and royalty income
- Nonqualified annuities
- Businesses (classified as “passive activities”)
- Business income derived in the trading of financial instruments/commodities
- Capital gains
- Interest and dividends
Tax lawyers can advise ways to minimize the NIIT to meet an individual’s specific needs. Several opportunities are available, a few of which may include:
Gifting. Both charitable giving and gifting to family may help minimize NIIT. According to Forbes, “Donate appreciated property to your favorite charity and you can deduct the full value of your gift but won’t have to recognize the appreciation for purposes of either the capital gains income tax or the NIIT.” Family members with lower incomes may be able to receive and sell assets and still remain below the NIIT threshold, while the donor reduces income and enjoys a lower NIIT.
Avoiding Individual Retirement Account (IRA) conversions. Converting a Traditional IRA to a Roth IRA will affect a taxpayer’s adjusted gross income, which can then trigger additional NIIT. Distributions from Traditional IRAs are included in adjusted gross income, whereas Roth account distributions are not be included.
Divorce or marriage delay. This may seem extreme, but the NIIT is not slated to adjust for inflation. High income earning couples may reduce their tax significantly if they divorce or delay their marriage. A tax attorney can advise if this is beneficial. Several estate planning tools for unmarried couples can help afford many rights and privileges typically granted only through marriage.
NIIT also applies to Trusts and Estates, starting at only $12,150 of income (2014 amount). Careful investment and distribution planning can reduce or eliminate the NIIT in estates and trusts.