Caught In the Net Investment Income Tax? When to File Form 8960 | IRS.com (2024)

Caught In the Net Investment Income Tax? When to File Form 8960 | IRS.com (1)

Excited about passive income? So were we, until we got to the NIITy gritty.

Form 8960, also known as the Net Investment Income Tax Individuals, Estates, and Trusts, is used to calculate the Net Investment Income Tax (NIIT). This tax is applicable for individuals, estates, and trusts and is in addition to regular income taxes. This includes income from dividends, capital gains, rental income, and more. Form 8960 takes into account different types of income and calculates the net investment income tax liability.

When filling out Form 8960, there are specific instructions to follow. You will need to provide information regarding your investment income and deductions. This includes entries for different types of income, such as interest, dividends, and capital gains. Additionally, if you have foreign income taxes paid or accrued, there are separate sections to report income taxes attributable to net investment income.

Explaining the Net Investment Income Tax and Its Purpose


Video by Forrest Baumhover.

The Net Investment Income Tax (NIIT) is a tax imposed on certain types of investment income, applicable to individuals, estates, and trusts. This tax was introduced to help fund the Affordable Care Act.

For individuals, NIIT applies if they have a filing status of either married filing separately with income over $125,000, single or head of household with income over $200,000, or married filing jointly with income over $250,000. Estates and trusts must file Form 8960 if they have undistributed net investment income and adjusted gross income exceeding the highest tax bracket threshold.

Net investment income includes income from various sources such as dividends, capital gains, rental income, and certain passive activities. It does not include regular wages, self-employment income, or income from tax-exempt bonds. Modified adjusted gross income (MAGI) serves as a threshold determining who is subject to the NIIT.

To calculate NIIT, individuals, estates, and trusts need to complete Form 8960. This form requires reporting different types of investment income, such as interest, dividends, and capital gains. It also allows for deductions such as investment interest expenses and expenses related to rental activities. In the case of foreign income taxes paid or accrued, there are specific portions of the form to report income taxes attributable to net investment income.

Overall, the NIIT is designed to ensure that individuals, estates, and trusts with substantial investment income contribute to funding the Affordable Care Act. Completing Form 8960 accurately is crucial to determine net investment income tax liability.

When You Need to Use Form 8960

Form 8960 is a necessary document for individuals, estates, and trusts that have net investment income above a certain threshold. The threshold amounts vary depending on the filing status. For individuals, Form 8960 applies if their filing status is either married filing separately with income over $125,000, single or head of household with income over $200,000, or married filing jointly with income over $250,000.

It’s important to note that if the net investment income is zero or less, Form 8960 does not need to be filed. This form is specifically designed to calculate and report the net investment income tax (NIIT).

Net investment income includes income from various sources such as dividends, capital gains, rental income, and certain passive activities. However, regular wages, self-employment income, and income from tax-exempt bonds are not considered part of the net investment income.

To accurately calculate NIIT, individuals, estates, and trusts must complete Form 8960. This form requires reporting different types of investment income, including interest, dividends, and capital gains. Additionally, it allows for deductions such as investment interest expenses and expenses related to rental activities. If there are any foreign income taxes paid or accrued, specific portions of the form should be used to report the income taxes attributable to net investment income.

Your Guide to Completing the Net Investment Income Tax Form

When it comes to filing this tax return form, understanding the instructions for Form 8960 is crucial. This form is used to calculate and report the Net Investment Income Tax (NIIT). Let’s dive into the details of completing this form.

1. Investment Income: The first part of Form 8960 requires reporting various types of investment income, such as interest, dividends, and capital gains. You’ll need to gather information from your 1099 forms and other relevant documents to accurately report this income.
2. Investment Expenses Allocable to Investment Income and Modifications: This section allows for deductions such as investment interest expenses and expenses related to rental activities. Make sure to gather all the necessary documentation to support these deductions and report them accurately on the form.
3. Tax Computation: The final part of Form 8960 involves calculating the actual tax owed. This is where you’ll determine if you need to pay the Net Investment Income Tax or not. To determine if you need to use Form 8960, compare your Modified Adjusted Gross Income (MAGI) with the applicable threshold amounts specified in the instructions. Be sure to check your applicable threshold on the most recent version of Form 8960.

By following these instructions, individuals can determine if they need to file Form 8960 and accurately calculate their Net Investment Income Tax liability. Don’t forget to gather all the necessary documentation and consult a tax professional if needed to ensure compliance with the instructions.

References:

IRS Form 8960 walkthrough (Net Investment Income Tax for Individuals, Estates, & Trusts)” – Forrest Baumhover, Certified Financial Planner and tax practitioner at Teach Me! Personal Finance.

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Caught In the Net Investment Income Tax? When to File Form 8960 | IRS.com (2024)

FAQs

What triggers the IRS form 8960? ›

Attach Form 8960 to your return if your modified adjusted gross income (MAGI) is greater than the applicable threshold amount. Use Form 8960 to figure the amount of your Net Investment Income Tax (NIIT). Controlled foreign corporation (CFC).

Who needs to fill out form 8960? ›

Dealing with Capital Gains and Dividends

If your MAGI is above the 3.8 threshold, you may need to fill out Form 8960 and Form 4952. These forms help you figure out the Medicare contribution tax on your NII. Make sure to include any investment interest expenses on line 9 of your Form 1040.

What is the threshold for 8960? ›

The applicable threshold amount is based on your filing status. Married Filing Jointly or Qualifying Surviving Spouse is $250,000. Married Filing Separately is $125,000. Single or Head of Household is $200,000.

Which income is subject to the 3.8% net investment income tax? ›

Those who are subject to the tax will pay 3.8 percent on the lesser of the following: their net investment income or the amount by which their modified adjusted gross income (MAGI) extends beyond their specific income threshold. Net investment income typically includes the following: interest. dividends.

How to avoid the net investment income tax? ›

How do you avoid the net investment income tax? You can avoid the net investment income tax by keeping your MAGI below $200,000 for single filers, $250,000 for those married filing jointly or $125,000 for those married filing separately. But that doesn't mean you have to make less money.

Why am I getting net investment income tax? ›

The Net Investment Income Tax is imposed by section 1411 of the Internal Revenue Code. The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts.

What income is excluded from net investment income? ›

The NIIT doesn't apply to wages, unemployment compensation, or income from a nonpassive business. The NIIT also doesn't apply to certain types of income that taxpayers can The NIIT doesn't apply to wages, unemployment compensation, or income from a nonpassive business.

How to calculate net investment income? ›

Net investment income is calculated by adding up all of the income you earned from investments in the past tax year and subtracting any related expenses.

Do you have to report all investment income? ›

While all capital gains are taxable and must be reported on your tax return, only capital losses on investment or business property are deductible.

What is the limit for net investment income? ›

Individuals
Threshold for Net Investment Income Tax
Single$200,000
Head of Household$200,000
Married filing separately$125,000
Married filing jointly$250,000
2 more rows

What is the threshold for reporting investment income? ›

Net Investment Income Tax (NIIT) Thresholds
Your Filing StatusThreshold Amount
Married Filing Jointly$250,000
Married Filing Separately$125,000
Head of Household (With Qualifying Person)$200,000
Qualifying Widow(er) With Dependent Child$250,000
1 more row
May 23, 2024

Can I deduct state income taxes on form 8960? ›

The total of the state, local, and foreign income taxes that you paid for the current tax year is entered on line 9b of Form 8960. Enter only the tax amount that is attributed to the net investment income.

What is Form 8960 net investment income tax? ›

Form 8960 is the IRS form used to calculate your total net investment income (NII) and determine how much of it may be subject to the 3.8% Medicare contribution tax.

What is the NIIT threshold for 2024? ›

The thresholds are: MFJ – $250,000, single or HOH – $200,000, and MFS – $125,000. Under current law this does not apply to trade or business income. Note that the NIIT applies to a trust or estate's undistributed net investment income with a threshold of $15,200.

At what income does the 3.8 surtax kick in? ›

A Medicare surtax of 3.8% is charged on the lesser of (1) net investment income or (2) the excess of modified adjusted gross income over a set threshold amount. The threshold is $250,000 for joint filers, $125,000 for married filing separately, and $200,000 for all other filers.

At what income level does the 3.8 surtax kick in? ›

A Medicare surtax of 3.8% is charged on the lesser of (1) net investment income or (2) the excess of modified adjusted gross income over a set threshold amount. The threshold is $250,000 for joint filers, $125,000 for married filing separately, and $200,000 for all other filers.

How much income triggers a tax return? ›

Tax Year 2022 Filing Thresholds by Filing Status
Filing StatusTaxpayer age at the end of 2022A taxpayer must file a return if their gross income was at least:
single65 or older$14,700
head of householdunder 65$19,400
head of household65 or older$21,150
married filing jointlyunder 65 (both spouses)$25,900
6 more rows

What is the net investment income tax imposed on? ›

The net investment income tax (NIIT) may be imposed on higher-income individuals, estates and trusts with net investment income.

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