Form 8960 – Net Investment Income Tax: A Complete Guide for U.S. Taxpayers

The Net Investment Income Tax (NIIT) is a surtax of 3.8% on certain types of investment income. It was enacted under the Affordable Care Act in 2013 and applies to individuals, estates, and trusts with income above certain thresholds. The purpose of the tax is to help fund Medicare and expand healthcare coverage.

Who Must File Form 8960?

You must file Form 8960 if you are an individual with:

• Net investment income, and
• Modified Adjusted Gross Income (MAGI) over the threshold amount

MAGI Thresholds:

• Single or Head of Household: $200,000
• Married Filing Jointly: $250,000
• Married Filing Separately: $125,000
• Qualifying Widow(er) with Dependent Child: $250,000

Trusts and estates are subject to the tax if they have undistributed net investment income and adjusted gross income over the threshold for the year (roughly $14,450 for 2024).

What Qualifies as Net Investment Income?

Net Investment Income includes—but is not limited to—the following:

• Interest
• Dividends
• Capital gains
• Rental and royalty income
• Non-qualified annuities
• Income from passive business activities
• Income from trading financial instruments or commodities

Exclusions: Net investment income does not include wages, unemployment compensation, Social Security benefits, alimony, tax-exempt interest, or self-employment income.

Structure of Form 8960

Form 8960 is divided into three major sections:

Part I – Investment Income

This section details the components of investment income. You will itemize gross income from interest, dividends, capital gains, rental income, and other sources. You will also subtract related expenses such as investment advisory fees or state taxes attributable to investment income.

Part II – Modified Adjusted Gross Income

This part is used to calculate your MAGI, which is generally your Adjusted Gross Income (AGI) from Form 1040, with certain adjustments. If you are a U.S. expat claiming the Foreign Earned Income Exclusion, this amount is added back to compute your MAGI.

Part III – Net Investment Income Tax

This section compares your net investment income and the amount your MAGI exceeds the threshold. The 3.8% tax is applied to the lesser of these two amounts.

How to Calculate the Tax

To determine your Net Investment Income Tax, follow these basic steps:

1. Calculate total net investment income (Part I)
2. Determine your MAGI and the threshold amount for your filing status (Part II)
3. Subtract the threshold amount from your MAGI
4. Compare the result to your net investment income
5. Apply 3.8% to the lesser of the two amounts

Examples of NIIT Calculation

Example 1: Sarah is single and earns $230,000 in MAGI. Her net investment income is $50,000.

• MAGI – Threshold = $230,000 – $200,000 = $30,000
• NIIT applies to the lesser of $30,000 or $50,000 = $30,000
• Tax = 3.8% of $30,000 = $1,140

Example 2: John and Lisa file jointly and earn $400,000, of which $75,000 is net investment income.

• MAGI – Threshold = $400,000 – $250,000 = $150,000
• NIIT applies to the lesser of $75,000 or $150,000 = $75,000
• Tax = 3.8% of $75,000 = $2,850

How to Reduce or Avoid NIIT

Here are some legitimate tax strategies to reduce or eliminate NIIT:

• Tax-loss harvesting: Offset gains with capital losses
• Invest in tax-exempt municipal bonds
• Shift investments to tax-deferred accounts (e.g., IRAs, 401(k)s)
• Donate appreciated assets to reduce capital gains
• Use installment sales to spread income over several years
• Income timing: Delay income to fall below the threshold

Filing Requirements and Deadlines

Form 8960 must be filed with your federal tax return (Form 1040) by the annual tax deadline, typically April 15. If you are filing an extension, Form 8960 will be due with the extended return.

You can e-file Form 8960 using tax software or file it manually as part of your tax return. Ensure that you keep documentation of all investment income and expense calculations.

Form 8960 and State Income Taxes

Some states have their own investment income taxes or surcharges that apply in addition to NIIT. For example, California imposes additional taxes on high earners. However, Form 8960 is strictly a federal tax form and is not used for state returns.

Common Mistakes to Avoid

• Failing to report investment income correctly from Form 1099s
• Misclassifying passive income as active business income
• Ignoring the impact of foreign income on MAGI
• Not subtracting deductible investment expenses properly
• Incorrect threshold calculation based on filing status

Conclusion

Form 8960 is a critical form for high-income taxpayers with significant investment income. While the 3.8% Net Investment Income Tax may not apply to everyone, those who are affected must report it correctly to avoid penalties and ensure compliance with federal tax laws. With proper planning, individuals can manage their investment portfolios in a tax-efficient way and potentially reduce their exposure to NIIT. Always consider consulting with a qualified tax professional if your investment situation is complex or if you are unsure about your filing obligations.