What Is the NIIT Tax Form (Form 8960)?

The Net Investment Income Tax, or NIIT, is a tax that some individuals, estates, and trusts may have to pay in addition to their regular income taxes. It is a 3.8% tax levied on certain investment income for those with earnings above specific thresholds. This tax was introduced as part of the Affordable Care Act to ensure that high-income earners contribute to Medicare from their non-wage income. The NIIT is calculated on either a taxpayer’s net investment income or the amount their income exceeds a set limit, whichever is less.

Determining if You Are Subject to the NIIT

Two conditions must be met for a taxpayer to be subject to the Net Investment Income Tax. The first is that the taxpayer must have net investment income, which generally includes earnings from investments rather than from a job. The second condition is that a taxpayer’s Modified Adjusted Gross Income (MAGI) must exceed a threshold based on their filing status.

For single or head of household filers, the threshold is $200,000. For those who are married filing jointly or a qualifying widow(er), the threshold is $250,000. A married person filing a separate return has a threshold of $125,000. These thresholds are not indexed for inflation.

A taxpayer is only liable for the NIIT if both conditions are met. If a taxpayer has investment income but their MAGI is below the threshold, they will not owe the tax. Similarly, if their MAGI is above the threshold but they have no net investment income, they will not be subject to the NIIT.

Calculating Net Investment Income

The calculation of net investment income begins with identifying specific types of gross income that are included. These generally encompass:

• Interest, dividends, and capital gains
• Rental and royalty income
• Non-qualified annuities
• Income from businesses involved in trading financial instruments or commodities
• Income from a business if it is a passive activity for the taxpayer

Certain types of income are explicitly excluded from the calculation. This includes:

• Wages, unemployment compensation, and Social Security benefits
• Operating income from a nonpassive business
• Tax-exempt interest, such as interest from municipal bonds
• Distributions from most retirement plans like 401(k)s and traditional IRAs
• Gains from the sale of a primary residence up to the standard exclusion amounts ($250,000 for single filers and $500,000 for joint filers)

To arrive at the final net investment income figure, certain deductions that are properly allocable to the investment income can be subtracted. These deductions can include investment interest expense, state and local income taxes attributable to investment income, and rental and royalty expenses.

Information and Documentation for Form 8960

To accurately calculate the Net Investment Income Tax, taxpayers must use Form 8960. Before beginning this form, it is necessary to gather several source documents that provide the figures needed for the calculations, as these report the various types of investment income and expenses.

Key documents include Form 1099-INT for interest income, Form 1099-DIV for dividends and capital gain distributions, and Form 1099-B for proceeds from broker and barter exchange transactions. These forms provide the raw data for much of the income reported in Part I of Form 8960. For those with income from partnerships, S corporations, estates, or trusts, Schedule K-1 will be a necessary document.

Other schedules from the taxpayer’s own Form 1040 are also required. Schedule D (Capital Gains and Losses) is used to determine the net capital gain or loss, a figure that feeds into the Form 8960 calculation. Schedule E (Supplemental Income and Loss) provides the net income or loss from rental real estate and royalty properties.

Completing and Filing Form 8960

The process of completing Form 8960 is structured into three parts that guide the taxpayer through the calculation of the NIIT. The form synthesizes information from other documents to arrive at the final tax liability.

Part I of the form is dedicated to summarizing all investment income. Taxpayers will enter figures for interest, dividends, annuities, rental income, and capital gains. Part II of the form allows for the subtraction of expenses that are directly related to generating this investment income, such as investment interest expense and state income taxes on investments.

The final step is Part III, Tax Computation, where the actual NIIT is calculated. Here, the taxpayer compares their net investment income (from Part I minus Part II) to the excess of their MAGI over the applicable threshold. The 3.8% tax is applied to whichever of these two amounts is smaller. The resulting tax liability is then carried from Form 8960 to Schedule 2 of Form 1040.