IRS Form 8960 Instructions Guide to Net Investment Income Tax

IRS Form 8960 Instructions Guide to Net Investment Income Tax

Increase AGI by the amount of any distributions described in section 959(d) or 1293(c) included in your net investment income as a dividend (not applicable to tax years beginning before 2014). The amounts reported on line 10 are the amounts allowable after the application of the deduction limitations imposed by sections 67 and 68, as applicable. See Deductions subject to AGI limitations under section 67 or section 68 next.

  1. At the time of this writing, the highest tax bracket threshold for 2021 was $13,050.
  2. In the case of a QFT, see Special computational rules for qualified funeral trusts (QFTs), earlier, to determine the amount to report on Form 8960, line 19b.
  3. The calculated amount is your net investment income tax liability, or the amount of net investment income tax individuals must pay in addition to their regular income tax.
  4. This rule doesn’t apply to interest received on loans made to a trade or business engaged in the trading of financial instruments or commodities.

The amount of the gain or loss from the disposition for regular income tax purposes is included on Form 8960, line 5a, as a gain or loss. The adjustment described below only applies to dispositions of equity interests in partnerships and stock in S corporations and doesn’t apply to gain or loss recognized on, for example, indebtedness owed to the taxpayer by a partnership or S corporation. J’s taxable income, as reported on Form 1040 is $1,374,874 ($1,650,000 – $300,000 – $50,000 + $33,000 + $41,874). Her net investment income, as reported on Form 8960, line 12 is $1,403,000 ($1,650,000 – $230,000 – $17,00046). J’s MAGI over the threshold amount, as reported on Form 8960, line 15, is $1,450,000 ($1,650,000 – $200,000). Therefore, the amount of income taxed for net investment income purposes is $1,403,000 (lesser of $1,403,000 or $1,450,000), which is in excess of the total taxable income reported on Form 1040.

The trust’s undistributed net investment income is $61,398 ($90,000 + $30,000 – $37,500 – $22,500 + $1,398). The trust’s AGI over the threshold amount is $57,750 ($90,000 + $30,000 – $50,000 – $100 – $12,150). Therefore, the amount of income taxed for net investment income purposes is $57,750 (lesser of $61,398 or $57,750), which is in excess of the taxable income reported on Form 1041 by $8,852.

Part II: Investment Expenses Allocable to Investment Income and Modifications

If you hold an interest in a pass-through entity, the determination of whether a trade or business exists is made at that entity’s level. For line 4b adjustments, enter net positive amounts as a negative adjustment and enter net negative amounts as a positive adjustment. Enter the gross income from all annuities, except annuities paid from the following.

Who Needs to File Form 8960?

Other investments that can help reduce MAGI include growth stocks, which typically don’t pay dividends and won’t affect your MAGI until you sell them and realize gains. Instruments like whole life policies that accumulate cash value and tax-deferred annuities don’t generate taxable income until withdrawal. Importantly, aim to maximize contributions to tax-advantaged retirement vehicles like 401(k) and SEP accounts. Unlike IRA contributions, contributions to these accounts do decrease your MAGI.

What individuals are not subject to the Net Investment Income Tax?

If you’re a real estate professional for purposes of section 469(c)(7), your rental income or loss won’t be passive if you materially participated in the rental real estate activity with certain restrictions. For taxable years beginning before Jan. 1, 2014 (e.g., calendar year 2013), taxpayers may rely on the 2012 proposed regulations (published on Dec. 5, 2012), the 2013 proposed regulations (published on Dec. 2, 2013), or the 2013 final regulations (published on Dec. 2, 2013) for purposes of completing For example, reasonable adjustments may be required to ensure that no item of income or deduction is taken into account in computing net investment income more than once, and that carryforwards, basis adjustments and other similar items are adjusted appropriately. 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.

Toulouse filed a written protest with the IRS Appeals Office (Appeals). After a conference, Appeals sent her a letter stating that she was not entitled to a foreign tax credit against the net investment income tax and that it treated her protest as a claim for a refund. Adjusted Gross Income (AGI) is a taxpayer’s gross income minus allowable deductions.

Net investment income includes investment income such as interest, dividends, capital gains, and income from passive activities. Use line 6 to make increases or decreases to net investment income as a result of this rule (for items that aren’t otherwise reflected on Form 8960). While theory dictates that the total taxable net investment income on Forms 1040, 1041, and 8960 should match, subtle differences among the three calculations (taxable income, net investment income, and AGI) give rise to results that Congress probably did not intend. Namely, Forms 1040, 1041, and 8960 differ on the deductibility of (1) tax preparation fees; (2) legal fees; (3) fiduciary fees;42 (4) miscellaneous itemized deductions; (5) investment interest expense; (6) charitable deductions; and (7) state and local taxes (see the exhibit below). In general, the deduction for distributions of net investment income may not exceed the taxable income distributed to the beneficiary for regular income tax purposes.

Dual-status individuals include only tax items related to their period of U.S. residency. Don’t include any adjustment for interest income on line 7 (as a negative amount) if the corresponding interest deduction is also taken into account in determining your self-employment income that’s subject to tax under section 1401(b). If the recovered amount relates to a deduction taken in a tax year beginning before 2013, none of the recovery is included in net investment income in the year of recovery.

They speak the tricky language of taxes and can help you better understand your return. DO NOT use the following worksheet to calculate limitations for tax years beginning after 2017 and before 2026. If Form 4952 includes investment interest expense that’s deducted on Schedule E (Form 1040) and already taken into account on line 4a, don’t include the same amount on line 9a. If you have more than one of the deductions described above, you may use a different method of allocation for each one. The reasonable method of allocation may differ from year to year. No portion of an NOL incurred in a tax year beginning before 2013 is permitted to reduce net investment income.

Proposed regulations would update rules for consolidated returns

However, this rule doesn’t apply if you incurred an NOL in the year of the deduction, and a portion of your NOL is a section 1411 NOL. If you dispose of an activity that’s always been a passive activity, the suspended passive losses from that activity are allowed in full as a properly allocable deduction. Attach Form 8960 to your return if your modified adjusted gross income (MAGI) is greater than the applicable threshold amount. Taxpayer also received $90,000 from a passive partnership interest, which is considered Net Investment Income. The Net Investment Income Tax is subject to the estimated tax provisions. Individuals, estates and trusts that expect to be subject to the tax in 2013 or thereafter should adjust their income tax withholding or estimated payments to account for the tax increase in order to avoid underpayment penalties.

Generally, for purposes of determining the gross amount of the recovery, include the recovery of any amount that was deducted in a prior year, regardless of the application of the tax benefit rule (see section 111). For example, if a taxpayer receives a refund of state income taxes from a prior year, such a refund would be included in the taxpayer’s gross income. However, if the taxpayer was subject to the alternative minimum tax in the year of the payment, the taxpayer may not have received any tax benefit under chapter 1 of the Code, and therefore section 111 may exclude some or all of the refund from gross income. However, the deductibility of state income taxes for NIIT is independent of the taxes for alternative minimum tax purposes. Therefore, the applicability of the recovery rule is determined without regard to whether the recovered amount was excluded from gross income by reason of section 111.

Form 1041, Schedule A, can be used as a worksheet to calculate the amounts of net investment income allocable to charitable distributions by including on line 2 both tax-exempt income and the difference between adjusted total income and the trust’s net investment income (Form 8960, line 18a). Report the amount of net investment income distributed to beneficiaries of the estate or trust and the amount of net investment income allocated to distributions to charity pursuant to section 642(c). The amount of the deduction for net investment income distributed to charities under section 642(c) is the amount of the net investment income allocated to the charity in accordance with Regulations section 1.642(c)-2(b) and the allocation and ordering rules under Regulations section 1.662(b)-2. In the case of the S portion of an Electing Small Business Trust, as defined by section 1361(e), report the amount of net investment income distributed to beneficiaries of the estate or trust and the amount of net investment income allocated to distributions to charity pursuant to section 170. Use Line 13—MAGI Worksheet in these instructions to compute your MAGI.

This distinction depends on the immigration status of the taxpayer. Form 1040-NR filers will only include taxes attributable to their U.S. residency period. Individuals filing Form 1040-NR will include only the amount of investment interest expense deduction for the period of U.S. residency. Individual taxpayers will enter form 8960 the interest expense paid or accrued during the tax year that was deducted on Schedule A (Form 1040), Line 9. MAGI is different from Adjusted Gross Income (AGI) for many expats. AGI is your total worldwide income minus a number of exclusions and deductions, including for many expats the Foreign Earned Income Exclusion.

If your income fluctuates significantly year to year, you may also be able to time the sale of your securities to years when your MAGI is below the NIIT threshold, Schiffer notes. If your MAGI exceeds the thresholds listed above, you’ll probably incur the net investment income tax and will need to calculate NIIT on Form 8960. In practical terms, this means that in addition to net investment income, you’ll also need your modified adjusted gross income (MAGI) to compute your NIIT. If you are a resident married to a nonresident, you likely will use the filing status of married filing separately (MFS) for purposes of calculating any applicable NII tax. Your tax professional or accountant can help you understand which steps to take so you can exclude rental real estate income from NIIT calculations.