On this page
- What is IRS Form 8960 used for?
- Who has to file Form 8960?
- What counts as net investment income?
- How does the NIIT apply to business owners?
- What about rental income and real estate professionals?
- How is Form 8960 laid out?
- Does the NIIT affect estimated payments?
- Can you reduce the NIIT?
- Related reading
- Frequently asked questions
- Your next step
IRS Form 8960 is the form used to calculate the net investment income tax (NIIT), a 3.8% tax on investment income that applies when your modified adjusted gross income (MAGI) is above a fixed threshold. It's filed by individuals, estates and trusts, and the result carries to your main return. If you sold a business, a rental property or a large block of stock, this is the form that decides whether a surcharge applies on top of your regular tax.
What is IRS Form 8960 used for?
Form 8960 computes the NIIT, which sits outside the regular income tax rate tables and is a separate tax. You attach the form to your Form 1040 (or to the trust or estate return, usually Form 1041), and the tax amount flows to Schedule 2. For how that schedule works, see our guide to IRS Schedule 2.
The tax is 3.8% of the lesser of two numbers: your net investment income, or the amount your MAGI exceeds the threshold for your filing status. That "lesser of" test is the part people miss. Having a high income doesn't mean the whole investment income is taxed, and having a large gain doesn't trigger the tax if your MAGI is under the line.
Who has to file Form 8960?
You generally file if you owe the NIIT, which means you have net investment income and your MAGI is above the threshold for your filing status. The statutory thresholds are not indexed for inflation:
| Filing status | MAGI threshold |
|---|---|
| Single or head of household | $200,000 |
| Married filing jointly or qualifying surviving spouse | $250,000 |
| Married filing separately | $125,000 |
Estates and trusts use a different threshold tied to the top bracket start for that tax year, and they complete the form differently. Nonresident aliens are generally outside the tax unless they elect to be treated as residents. Check the current instructions for your situation.
What counts as net investment income?
Net investment income is the sum of several categories, reduced by allowable deductions properly tied to them. In plain terms:
- Interest, dividends, annuities and royalties, unless earned in the ordinary course of a non-passive business.
- Rental income and income from passive trade or business activities, including many partnership and S-corporation interests where you don't materially participate.
- Net gains from selling property, including stock, a partnership interest or real estate, with the exceptions noted below.
- Income from a trade or business that is a passive activity, or one trading in financial instruments or commodities.
What is not net investment income matters just as much. Wages and self-employment income aren't included. Neither are qualified retirement plan distributions, tax-exempt municipal bond interest, or the excluded portion of gain on the sale of a main home. Those items can still raise your MAGI, which pushes you over the threshold.
How does the NIIT apply to business owners?
It depends on your participation. Income from a business you actively run is generally not net investment income. Income from a business you own but don't materially participate in generally is.
Take an S-corp owner who works full time in the company. The salary and her share of ordinary business income aren't subject to the NIIT. If she later sells the stock, the gain is NII only to the extent it's attributable to passive or non-business assets, which is a computation the Form 8960 instructions walk through. A partner in a fund she doesn't work in is in a very different position, because that flow-through income is typically investment income.
This is why entity structure and participation records matter well before the sale. Our S-corp tax services page covers how owner-level reporting fits together. For the wider planning angle, see tax planning.
What about rental income and real estate professionals?
Rental income is generally net investment income unless the rental is a trade or business in which you're not passive. Real estate professional status helps here, but the test is strict. Under IRC §469(c)(7), you must spend more than half of all your personal services across all trades or businesses in real property trades or businesses, and you must also exceed 750 hours in them during the year. Material participation in the specific rental activity is a separate requirement.
Holding two other jobs doesn't help you pass by being the biggest of three. The half-of-total test is measured against everything you do. If you qualify and materially participate, rental income can fall outside the NIIT. If you don't, it stays in. Passive loss limits interact with this, and Form 8582 covers how those losses are tracked.
Rental activity is reported on Schedule E, and gain on selling business or rental property often runs through Form 4797 before it reaches Form 8960.
How is Form 8960 laid out?
The form has three parts, and the logic is easy to follow once you see it.
- Part I: Investment income. Interest, dividends, annuities, rents, royalties, passthrough income and net gains. Adjustments remove amounts that are not subject to the NIIT, such as income from a non-passive business.
- Part II: Investment expenses and modifications. Deductions properly allocable to the income above, such as investment interest expense and the allocable share of state and local income taxes. Whether any other expense qualifies depends on the rules in effect for that tax year, so check the instructions rather than assuming.
- Part III: The tax. Net investment income is compared with the amount your MAGI exceeds the threshold. The smaller figure is multiplied by 3.8%.
MAGI for this purpose is your adjusted gross income, increased by any foreign earned income exclusion you took. Capital transactions feed in from Schedule D, so those need to be right first.
Does the NIIT affect estimated payments?
Yes. The NIIT is part of your total tax, so it counts toward the safe-harbor calculation for estimated payments. A one-time large gain can create an underpayment penalty if nothing was paid in. If you expect a sale or a distribution, build the NIIT into your plan early. Our guide to quarterly estimated taxes explains timing and safe harbors.
Can you reduce the NIIT?
Often, but only through things that change the underlying numbers, not through the form itself. Many owners and investors look at participation status, the timing of gains, and managing MAGI in a high-income year. Others look at which entity holds an asset before it is sold. Each has tradeoffs and depends on your facts, which is the reason to model it before the transaction closes, not after. Our tax planning page outlines how we approach that.
If you've received an IRS notice about an NIIT mismatch or a missing Form 8960, our IRS tax problem help page explains the response process.
Related reading
Frequently asked questions
Do I have to attach Form 8960 to my return every year?
Only if you owe the NIIT or are otherwise required to complete the form under its instructions. If your MAGI is below the threshold, you usually don't file it.
Is the 3.8% net investment income tax the same as the Medicare surtax on wages?
No. The Additional Medicare Tax applies to wages and self-employment income and is reported on Form 8959. The NIIT applies to investment income and is reported on Form 8960. A high earner with both kinds of income can owe both.
Are the NIIT thresholds adjusted for inflation?
No. The $200,000, $250,000 and $125,000 thresholds are set by statute and aren't indexed, so more taxpayers cross them over time.
Is the gain on selling my home subject to the NIIT?
The gain you can exclude under the main-home rules is not NII. Any gain above the exclusion can be. Rental or business use of the home can change the result.
Where do I find the official Form 8960 instructions?
The IRS publishes the form and instructions for each tax year on IRS.gov. Use the version matching the year you're filing, since line references can change.
Your next step
Before a sale, a large distribution or a year with unusual income, run the NIIT calculation as part of your projection so the number isn't a surprise at filing. SBZ Tax can help you work through it. Book a free consultation, call 818-748-2020, or visit the office at 190 Sierra Ct Ste 335, Palmdale, CA 93550. We work with clients nationwide.
This article is general information, not tax advice for your specific situation. Thresholds and rules change, so confirm current figures and talk to a qualified tax professional before acting.
