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NITT Picking at Railroad Retirement

Retirement Financial Planning Investing Taxes


Learn about this hidden tax that will affect high-earning railroaders. Welcome everyone to another edition of the Highball Advisors Railroad Retirement Whiteboard. My name is John McNamara of Highball Advisors, and today we're going to do a little tax planning in this session. We're going to learn about a tax that affects a small segment of railroaders, but those individuals need to know what's going on. It's a smaller tax, but it does impact at higher income levels. So, what am I talking about? It's called the Net Investment Income Tax, the NIIT for short. Right.

It's a 3.8% tax on investment income, is what it comes down to. The reason that it came about was, it was there to help provide for the Obamacare expansion. They put this 3.8% on tax. Really, it's a tax that is added on top of your capital gains. So what gets taxed? Investment income. The majority of investment income will be from interest, fixed income, bonds, that type, capital gains and dividends. Those are where the 3.8% tax comes in.

So let's just kind of go walk through this. What triggers it is the Modified Adjusted Gross Income, the MAGI. If you're single, anything, if you have income over $200,000, your NIIT tax is going to kick in, and then if you're married filing jointly, if you have income over $250,000, the Net Investment Income Tax is going to kick in. So, what we want to look out for, your capital gains, if you've triggered it, your capital gains, which is normally in the 15% bracket is going to go up to 18.3% on your capital gains. Likewise, if you're in the 20% bracket... a 20% bracket is for people who have capital gains over a half a million dollars. I mean, it's going to be 23.8%, so it's that extra little bump up there.

So, what I want to point out here is some of the things that can boost your income, where you say, well, maybe I'm not really affected by it. Well, there's a couple of situations where ordinary railroaders might be doing strategies that might be bumping them up against this Net Investment Income Tax, and I think it's important just to be aware of it. So let's say if you're retiring and you're doing a large Roth Conversion or something, that boosts your ordinary income, maybe that moved you up into the $200,000 or $250,000, so you have to keep an eye on that, right. Or let's say you're exercising some stock options, restricted stock or non-qualified, that's going to boost your ordinary income, that could move you up, and now we're kicking in the net investment income tax again. Right.

So very important when you do these strategies, especially your Roth Conversions, you want to make sure that, hey, where is that net investment income tax, because I don't want to be paying that one. So, I want to be staging my Roth Conversions properly to keep an eye on that. Alright. So, you know what you can do is go over your old tax returns, if you had some high income years, see if there's a Form 8960 on there, in which case, that means you've paid some Net Investment Income Tax, alright. Talk to your accountant or your tax preparer about the situation.

I hope you found this information useful, a little tactical, but it's important to know. Right. We don't want to give too much money to Uncle Sam, right? So, also please subscribe to the YouTube channel, share with other railroaders, I do appreciate that. Reach out to me if you have any tax planning questions about this stuff, and say, "Hey, walk me through this net investment income tax again." Reach out to me, maybe schedule a Boarding Ferrero Retirement Assessment, really great information on those nearing railroad retirement. Great way to learn about some strategies to de-accumulate your assets. In the meantime, everyone, please, till next time, please stay safe, stay on track and take care. So long, everybody. Bye.

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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. Highball Advisors encourages you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Highball Advisors, and all rights are reserved.from Highball Advisors, and all rights are reserved.