Form 8960 (Net Investment Income Tax)
Form 8960 is the IRS form used to calculate and report the 3.8 percent Net Investment Income Tax (NIIT), which applies to the lesser of a taxpayer's net investment income or the amount by which their modified adjusted gross income exceeds the applicable income threshold.
The Net Investment Income Tax was enacted as part of the Affordable Care Act in 2013 to help fund Medicare expansion. It imposes an additional 3.8 percent tax on certain investment income earned by individuals, estates, and trusts whose income exceeds statutory thresholds. For individuals, the thresholds are $200,000 for single filers, $250,000 for married filing jointly, and $125,000 for married filing separately — and unlike many tax parameters, these thresholds are not adjusted for inflation, meaning more taxpayers become subject to the NIIT over time as incomes rise.
Net investment income as defined under IRC Section 1411 includes interest, dividends, capital gains (both short-term and long-term), rental and royalty income, non-qualified annuity income, and income from passive activities. It does not include wages, self-employment income, Social Security benefits, tax-exempt interest, or distributions from qualified retirement plans and IRAs. The exclusion of retirement account distributions is significant — a taxpayer who takes large IRA withdrawals may see their MAGI rise above the threshold and trigger NIIT on other investment income already in their portfolio even though the IRA distribution itself is exempt.
Part I of Form 8960 calculates total net investment income by listing investment income categories and then subtracting allocable investment expenses such as advisory fees, brokerage fees, state income taxes on investment income, and certain investment interest expense. Part II computes MAGI and subtracts the applicable threshold to find the excess amount. Part III takes the lesser of net investment income or the MAGI excess and applies the 3.8 percent rate to arrive at the NIIT owed, which is then entered on Schedule 2 of Form 1040 as an additional tax.
Capital gains are a major driver of NIIT liability for investors. A large sale of appreciated stock or real estate can simultaneously push MAGI above the threshold and generate the net investment income subject to the tax. Long-term capital gains that are taxed at the 20 percent preferential rate thus effectively face a combined federal rate of 23.8 percent for high-income filers, plus the applicable state capital gains tax rate. Real estate investors selling rental property may face NIIT on the gain, though gain attributable to the Section 1250 unrecaptured depreciation portion is taxed at ordinary rates.
Strategies for managing NIIT exposure include tax-loss harvesting to reduce net capital gains, timing large sales across multiple tax years to stay below the MAGI threshold, maximizing retirement plan contributions to reduce MAGI, investing in tax-exempt municipal bonds whose interest is excluded from net investment income, and directing portfolio investments into qualified opportunity zone funds that defer or exclude capital gains.