If you earn income from any of your investments this year, you may have to pay the net investment income tax, in addition to the regular income taxes you owe. You won't know for sure until you fill out Form 8960 to calculate your total net investment income. But before you sit down with the form, you may want to consider whether your income and filing status requires it.
The tax explained
The net investment income tax (NIIT) is a 3.8-percent tax on the smaller of your net investment income or modified adjusted gross income. See how much NIIT you owe by completing Form 8960. The tax only applies if you report net investment income; your wages and self-employment earnings, by themselves, have no impact on the NIIT.
When to use Form 8960
Just having net investment income to report doesn’t necessarily mean you will be subject to the NIIT. The additional tax only applies if your modified adjusted gross income, or MAGI, is over a certain amount. The IRS calls this a “threshold” and the amount of the threshold depends on your filing status. For example, for tax year 2014:
- If you file a joint return or use the qualifying widow(er) status, your MAGI (as of publication date) has to be more than $250,000
- If you're married but file separately, your MAGI has to be more than $125,000
- Single and head-of-household filers can report an MAGI of $200,000 or less
Your MAGI is a variation of the adjusted gross income (AGI) that's reported on the first page of your tax return form, though for most people the two amounts are the same.
Figuring out your net investment income
Part one of Form 8960 lists the various types of earnings considered investment income. Investment earnings commonly include interest, dividends, income from rental properties, royalties and the profit you earn from trading stocks.
Part two subtracts certain deductible investment-related expenses from the total investment income reported in part one. Deductible expenses cover the cost of hiring a financial adviser, brokerage fees, state and local income taxes, and in some cases, the interest you pay on funds you borrow to invest with.
When to file Form 8960
If your MAGI is above the threshold amounts mentioned above, you may need to prepare Form 8960 to see what your net investment income is. If it turns out that your net investment income is zero or less, you don’t need to file the form with your taxes. If your net investment income is $1 or more, Form 8960 helps you calculate the NIIT you owe by multiplying the amount by which your MAGI exceeds the applicable threshold or your net investment income—whichever is the smaller figure—by 3.8 percent. You then enter your NIIT liability on the appropriate line of your tax form, and file Form 8960 with your return.
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