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A critical aspect of financial planning that is often overlooked is taxes. As a Lockheed Martin employee, you are probably already familiar with payroll taxes and income taxes. However, as you near and enter retirement, there can be additional taxes assessed on your investments. This post will discuss the Net Investment Income Tax, which is a separate calculation from your federal income tax liability.
Let’s start with defining investment income. Investment income includes interest, dividends, capital gains, rental income, royal income, and non-qualified annuity income that is generated from all of your investment vehicles. Further detail about investment income can be found here.
The questions then become when does it apply and how much is it? First, the additional Net Investment Income Tax only applies if both of the following conditions are met:
- Taxpayer has investment income
- Income level exceeds the appropriate threshold in the chart below
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Net Investment Income Tax Thresholds (2020 tax year)
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Second, the additional Net Investment Income Tax is a flat rate of 3.8%. The percentage applies to the lesser of either the:
- Amount over the income threshold
- Investment income amount
To help explain, let’s look at an example.
Example: Mark is single and earned $225,000 in wages and also had investment income of $40,000. The Net Investment Income Tax that he would owe would be $950. Let’s look at the math.
- $225,000 income from wages
– $200,000 threshold
$25,000 of excess over threshold (this is less than the $40,000 of investment income)
- $25,000 of excess over threshold
x 3.8% Net Investment Income Tax
$950
If Mark had a total income that was less than or equal to $199,999, he would not owe the additional tax because the total income below the threshold. Mark also would not owe the additional tax if he had no investment income at all, even if his other total income is above $200,000.
Tax planning such as this can help you save on your tax liability by keeping your income below the Net Investment Income Tax thresholds. “What would cause me to go above the threshold?” Great question! The most obvious answer is an increase in earned income, but other items such as interest, dividends, and capital gains also affect your overall income. As an example, when you sell a piece of property or an asset for more than the purchase price, a capital gain occurs and this increases your income for tax purposes. Therefore, it is wise to strategically plan when to experience higher earned income and investment income in certain years because this could affect how much you pay in additional taxes. At Strittmatter Wealth, we integrate the effects of income thresholds into our holistic planning approach, so book an appointment with a Lockheed Martin Retirement Specialist to see just how much you can save in taxes!
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Be sure and check back next week for more incredibly valuable information. Cheers!
Financial Planning and Investment Advisory offered by SWMG, LLC a Registered Investment Advisor.
Lockheed Martin Retirement Specialist is not an official title or professional designation nor is it conferred by Lockheed Martin on any individual or company.
Our Complementary consultation and free report are for informational purposes only and provided free without any obligation to utilize or retain our investment advisory services.
SMWG, LLC is not affiliated with or endorsed by Lockheed Martin Corporation. Our expertise comes from working with LMT employees for several years and helping them to retire with confidence.
Investing involves the risk of loss, including loss of principal. Past performance does not guarantee future results. Investment products are not FDIC insured, have no bank guarantee, and may gain or lose value. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable for a client’s investment portfolio.
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