How to File Net Investment Income Tax

Identifying Net Investment Income

Recognize investment income. Income you must include as investment income for NIIT purposes is laid out by statute and by the IRS. In general, your investment income will include the following: Interest (e.g., income from bank accounts and loans) Dividends (e.g., payouts from corporate stock holdings) capital gains (e.g., income from the sale of capital assets) Rent and royalty income (e.g., income from homes you rent) Nonqualified annuities (e.g., a certain type of insurance contract that pays you later in life)

Determine the specific type of gains that are included. You acquire capital gains income when you sell a capital asset. However, if you sell a capital asset at a loss, meaning you spent more on the asset than you sold it for, it will be considered a capital loss. When you are calculating your capital gains for investment income purposes, you will be able to offset capital gains with capital losses (i.e., you will be able to subtract your losses from the gains). Common capital assets that can be sold to create capital gains include: Gains from the sale of stocks, bonds, and mutual funds Certain distributions from mutual funds Gains from the sale of real estate you owned as an investment (i.e., not your primary residence) Gains from the sale of partnership interests so long as you were a passive owner

Distinguish income that is not included. The law also lays out some forms of income that are expressly not included in the definition of investment income. If you have any of these types of income, they will not count towards your investment income calculations. Common example of non-investment income include: Wages Unemployment compensation Income from a non passive business Social Security benefits Alimony Distributions from certain qualified plans Tax-exempt interest

Check for allowable deductions that will reduce your gross investment income. By adding up all the income included within the definition of investment income, you will arrive at your gross investment income. However, you must reduce your gross investment income by the amount of deductions allowed in order to reach your net investment income. In general, deductions are various costs and fees associated with obtaining the included investment income. Common examples of deductions you might be able to take in order to accurately calculate your net investment income include: Investment interest expenses Advisory and brokerage fees Expenses related to rental and royalty income Tax preparation fees Fiduciary expenses (if you are dealing with an estate or trust) State and local income taxes

Determining Whether You Owe the NIIT

Calculate your modified adjusted gross income (MAGI). Your MAGI is your adjusted gross income (AGI) increased by the amount of your net foreign earned income. If you do not have any foreign earned income (i.e., income you earned while living abroad), your MAGI will simply be your AGI. Your AGI is found on line 37 of Form 1040 or line 9 of Form 1041. To calculate your AGI for personal income tax purposes (and for NIIT purposes), you will add up all of your income from various sources (i.e., sources of income laid out in lines 7 through 21 of Form 1040). Examples of income include wages, business income, IRA distributions, farm income, unemployment compensation, and Social Security benefits. Next, subtract any allowable deductions (i.e., deductions laid on on lines 23-35 of Form 1040) from your total income. Examples of deductions include educator expenses, moving expenses, alimony paid, student loan interest deductions, and tuition and fees. The resulting number will be your AGI. As an example, assume your total income is $250,000 and your deductions equal $60,000. When you subtract the two, your AGI would be $190,000.

Determine if your MAGI is over the allowable threshold. Once you calculate your MAGI, you will have to compare it to the thresholds set by the IRS. If your MAGI exceeds the applicable threshold (and you have net investment income), you will be subject to the NIIT. The thresholds set by the IRS are: $250,000 if you are married filing jointly $125,000 if you are married filing separately $200,000 if you are single $200,000 if you are head of household $250,000 if you are a qualifying widower with a dependent child

Decide if you are an individual not subject to the tax. Some individuals are simply not subjected to the NIIT. If you fall into one of the exempted categories of persons, you will not have to report the NIIT. You will not be subject to the NIIT if you are a nonresident alien (NRA). You will be considered an NRA for NIIT purposes if you are a dual-resident who determines you are a resident of a foreign country for tax purposes. If you are a dual-status individual, you will only be subject to the NIIT for the period in which you are a U.S. resident.

Establish whether an estate or trust is subject to the tax. An estate or trust is subject to the NIIT if it has undistributed net investment income and an AGI over a certain dollar amount ($11,950 in 2013 and $12,150 in 2014). The dollar amount is set by the IRS annually. However, some trusts and estates are not subject to the NIIT. Those trusts and estates include charitable trusts, grantor trusts, real estate investment trusts, and perpetual care trusts. To calculate your AGI for trust or estate purposes (and for NIIT purposes), you will add up all of your income from various sources (i.e., sources of income laid out in lines 1 through 8 of Form 1041). Examples include interest income, ordinary dividends, business income, capital gains, and ordinary gains. Next, subtract any allowable deductions (i.e., deductions laid out on lines 10 through 15 and 18 through 20 of Form 1041). Examples of deductions include taxes, fiduciary fees, charitable deductions, attorney fees, income distribution deductions, and the exemption. The resulting number will be your AGI.

Reporting the NIIT

Visit the IRS website. If you have net investment income and your MAGI exceeds the applicable reporting threshold, you will be required to report the NIIT on your annual income tax return. All the information you need to report the NIIT can be found on the IRS website. The IRS website has forms, instructions, publications, and FAQs that can help you complete your reporting requirements. For example, the IRS website will provide you with Form 8960, 1040, and 1041. These are all forms you will need in order to file NIIT. In addition, you will be able to look at instructions for each of those forms. Also, you can browse the IRS website and find commonly asked questions as well as formal answers to those questions. All of these resources will help you immensely.

Use Form 8960 to compute the NIIT. Before you can report the NIIT liability you have, you must compute the NIIT. The IRS provides Form 8960, and instructions, to help you do this. Form 8960 and the instructions can be found on the IRS website. Whether you are an individual, trust, or estate, you will start the computation by determining your investment income and allowable deductions. Your investment income will be input in various places on lines 1 through 7 of Form 8960. The investment income total will be input on line 8 of Form 8960. Your deductions will be input in various places on lines 9 and 10 of Form 8960. The deduction total will be input on line 11 of Form 8960. You will then calculate your net investment income by subtracting line 11 (deductions) from line 8 (investment income). This number will be input in line 12.

Compute the NIIT as an individual. If you are an individual, you will next complete lines 13 through 17 to compute the NIIT. In line 13, input your MAGI. In line 14, input the filing threshold. Next, subtract the threshold from the MAGI. Put this number in line 15. Next, compare line 15 and line 12 and input the smaller of the two numbers in line 16. Finally, you will multiply line 16 by 3.8% (0.038). This is the NIIT. For example, assume you have a net investment income of $70,000 (your line 12 value), a MAGI of $300,000 (your line 13 value), and your threshold is $200,000 (your line 14 value). When you subtract $200,000 from $300,000, you get $100,000 (your line 15 value). If you compare $70,000 and $100,000, $70,000 is the smaller number. Therefore, you will input $70,000 in line 16. When you multiply $70,000 by .038, you get the NIIT of $2,660.

Compute the NIIT as a trust or estate. If you are a trust or estate, you will next complete lines 18a through 21 to compute the NIIT. In line 18a you will simply input your net investment income. In line 18b you will need to input the amount of any distributions of net investment income you have made out of the trust or estate. In line 18c, subtract line 18b from 18c, which will give you your undistributed net investment income. Next, in line 19a, you will input your AGI. In line 19b you will input the IRS provided dollar amount. In line 19c, subtract line 19b from line 19a. Next, in line 20, input the smaller of line 18c and 19c. Finally, multiply line 20 by 3.8% (0.038) and input the value in line 21. This is the NIIT. For example, assume you have a net investment income of $80,000 (your line 18a value) but you have made net investment income distributions in the amount of $25,000 (your line 18b value). When you subtract $25,000 from $80,000 you get $55,000, which is your undistributed net investment income (your line 18c value). Next, assume you have an AGI of $130,000 (your line 19a value) and the IRS provided dollar amount is $12,150 (your line 19b value). When you subtract $12,150 from $130,000 you get $117,850 (your line 19c value). Next, in line 20, input the smaller of $55,000 and $117,850, which is $55,000. Finally, multiply $55,000 by .038 to get the NIIT, which in this example is $2,090.

Report your tax liability on Form 1040 or Form 1041. Once you have computed the NIIT, you will need to report that number on the applicable income tax return. If you are filing an individual income tax return, you will use Form 1040. If you are a trust or estate, you will use Form 1041. On Form 1040, you will input the NIIT on line 62. On Form 1041, you will input the NIIT on Schedule G, line 4.

File the appropriate forms and pay the tax. You do not need to include Form 8960 in any filings you make to the IRS. If you are an individual, you will sign and file Form 1040 and any appropriate schedules. If you owe money to the IRS, you will attach a check or pay the amount due electronically, depending on how you file. If you are an estate or trust, you will sign and file Form 1041 and any appropriate schedules. If you owe the IRS money, attach a check or pay the amount electronically. You will file your return to the applicable address laid out in the form instructions. Be sure you send your return and payment to the correct address so it can be filed in a timely manner.