What Is the 8960 Tax Form and Who Needs to File It?

The IRS Form 8960 calculates the Net Investment Income Tax (NIIT), an additional 3.8% tax on certain investment income for high-income earners. Introduced under the Affordable Care Act, it affects individuals, estates, and trusts with significant investment earnings. Understanding whether you need to file this form is essential for tax planning.

Who Needs to File

Form 8960 applies to individuals, estates, and trusts exceeding specific income thresholds. Single filers owe the tax if their modified adjusted gross income (MAGI) surpasses $200,000, while married couples filing jointly have a $250,000 threshold. Those filing separately must consider a lower $125,000 limit. Estates and trusts are subject to the tax if their income exceeds $15,200 for 2024.

Since the tax is based on MAGI, adjustments can push taxpayers over the threshold. Wages, self-employment earnings, and retirement distributions are not directly taxed under NIIT but can increase MAGI, making investment income taxable. For example, a taxpayer earning $190,000 in wages with $15,000 in investment income would not owe the tax, but if their wages increased to $205,000, the entire $15,000 investment income would be taxed at 3.8%.

Estates and trusts have stricter limits, making tax planning crucial. Distributing income to beneficiaries can sometimes reduce exposure since individuals often have higher thresholds. However, this strategy depends on the tax situation of both the trust and its beneficiaries.

Types of Income Reported

Form 8960 requires reporting various types of investment income, including interest, dividends, and capital gains. Proper classification ensures accurate tax calculations.

Interest Income

Interest income includes earnings from bank accounts, bonds, and other interest-bearing investments, such as savings accounts, certificates of deposit (CDs), corporate bonds, and Treasury securities. Tax-exempt interest, such as municipal bond earnings, is not included in net investment income for NIIT purposes.

For example, if a taxpayer earns $5,000 in interest from a corporate bond and $2,000 from a municipal bond, only the $5,000 is subject to NIIT. Interest from private activity bonds, while tax-exempt for regular income tax purposes, may be included in alternative minimum tax (AMT) calculations but does not count toward NIIT.

Accrued interest from bond sales must also be reported. If an investor sells a bond between interest payment dates, the accrued interest received is taxable. Similarly, original issue discount (OID) bonds, which accrue interest over time rather than paying it periodically, require annual reporting of imputed interest, even if no cash payment is received.

Dividend Income

Dividends, corporate payments to shareholders, are categorized as qualified or nonqualified, with different tax treatments. Qualified dividends, meeting IRS criteria, are taxed at long-term capital gains rates (0%, 15%, or 20%, depending on taxable income). Nonqualified dividends, such as those from real estate investment trusts (REITs) and certain foreign corporations, are taxed at ordinary income rates.

For NIIT purposes, both types of dividends are included in net investment income. If a taxpayer receives $10,000 in qualified dividends and $3,000 in nonqualified dividends, the full $13,000 is subject to the 3.8% tax if their MAGI exceeds the threshold.

Dividends reinvested through a dividend reinvestment plan (DRIP) must be reported as income, even if the taxpayer does not receive cash. Foreign dividends may be subject to withholding taxes in the country of origin, but these can often be offset through the foreign tax credit on the taxpayer’s U.S. return.

Capital Gains

Capital gains result from selling assets such as stocks, real estate (excluding a primary residence exemption), and mutual funds. These gains are classified as short-term or long-term, depending on the holding period. Short-term gains, from assets held for one year or less, are taxed at ordinary income rates, while long-term gains benefit from lower capital gains tax rates.

For NIIT, all capital gains—whether from stock sales, mutual fund distributions, or property transactions—are included in net investment income. If a taxpayer sells stock for a $50,000 gain and has a MAGI above the threshold, the 3.8% tax applies to the full amount.

Losses can offset gains, reducing taxable investment income. If a taxpayer has $40,000 in gains but $10,000 in losses, only the net $30,000 is subject to NIIT. Additionally, up to $3,000 of net capital losses can offset other income annually, with excess losses carried forward to future years.

Installment sales, where payments are received over time, require prorated reporting of gains each year. Gains from passive real estate investments, such as rental properties not actively managed by the owner, are included in NIIT calculations. However, the sale of a primary residence may qualify for an exclusion of up to $250,000 ($500,000 for married couples) if ownership and use tests are met, reducing the taxable portion of the gain.

Deductions You Can Claim

Taxpayers can reduce taxable net investment income by claiming allowable deductions directly related to investment income production.

Investment interest expense is one deduction that can offset taxable income. This includes interest paid on loans used to purchase taxable investments, such as margin interest on brokerage accounts. The deduction is limited to net investment income for the year. If the interest expense exceeds this income, the unused portion can be carried forward. For example, if an investor incurs $5,000 in margin interest but only has $3,000 in net investment income, they can deduct $3,000 in the current year and carry the remaining $2,000 forward.

Expenses incurred in managing investments may also be deductible. Fees paid to financial advisors, investment managers, and tax professionals for managing taxable investments can be included, provided they are directly tied to income production. Subscription costs for financial publications or software used for investment tracking may qualify. However, these deductions must be itemized and are subject to the 2% adjusted gross income (AGI) limitation for miscellaneous deductions, which was suspended for individuals under the Tax Cuts and Jobs Act (TCJA) through 2025.

Rental and royalty income, if included in net investment income, allows for deductions related to property management, maintenance, and depreciation. For instance, if an individual earns passive rental income from a property but incurs costs for repairs and property taxes, those expenses can reduce the investment income subject to NIIT. Depreciation deductions, which spread the cost of an asset over its useful life, can provide additional tax benefits. However, upon the sale of the property, depreciation recapture rules apply, potentially increasing taxable gains.

Trusts and estates, which are also subject to NIIT, can claim deductions for administrative expenses directly tied to investment income. Trustee fees, legal expenses for managing investment assets, and accounting costs for preparing tax returns are all deductible. Properly allocating these expenses between taxable and non-taxable income sources ensures compliance with IRS guidelines.

Completing the Calculation

Determining NIIT liability requires calculating total net investment income, subtracting applicable deductions, and comparing the result to the amount by which MAGI exceeds the threshold. The tax applies to the lesser of these two amounts.

For instance, if a taxpayer reports $100,000 in net investment income but their MAGI exceeds the threshold by only $50,000, the 3.8% tax applies to $50,000, resulting in a $1,900 tax liability. If their MAGI exceeds the threshold by $120,000 but they only have $100,000 in net investment income, the tax applies to the full $100,000, leading to a $3,800 NIIT obligation.

Coordination with Other Tax Forms

Since Form 8960 calculates an additional tax on investment income, it must align with other tax forms. The figures reported often originate from other sections of a taxpayer’s return, and discrepancies can trigger IRS scrutiny.

One key connection is with Form 1040, where total income, including investment earnings, is reported. Capital gains and losses reported on Schedule D must match the amounts included on Form 8960. Trusts and estates filing Form 1041 must ensure that distributions to beneficiaries are correctly recorded, as beneficiaries must report this income on their individual returns. Proper allocation of deductions and expenses between taxable and non-taxable income sources helps minimize NIIT exposure.