What Form 8960 Is For
Form 8960 is used to calculate the Net Investment Income Tax (NIIT)—a 3.8% tax on certain investment income that applies to higher-income taxpayers. Congress created this tax under Section 1411 of the Internal Revenue Code, and it went into effect on January 1, 2013. Think of it as an additional tax layer on investment profits for individuals, estates, and trusts whose income exceeds specific thresholds.
The NIIT applies to investment income such as interest, dividends, capital gains, rental income, royalties, and certain business income from passive activities. Importantly, this tax doesn't apply to wages, self-employment income, Social Security benefits, unemployment compensation, or distributions from most qualified retirement plans. If you earn investment income and your total modified adjusted gross income (MAGI) exceeds threshold amounts that vary by filing status, you'll need Form 8960 to determine whether you owe this additional tax. IRS.gov - Net Investment Income Tax
When You’d Use Form 8960
Regular Filing
Regular Filing: You must attach Form 8960 to your annual tax return (Form 1040 for individuals, Form 1040-SR for seniors, or Form 1041 for estates and trusts) when your MAGI exceeds the applicable threshold amounts and you have net investment income. The form is due by the same deadline as your main tax return—typically April 15 for calendar-year taxpayers, though extensions may apply.
Amended Returns
Amended Returns: If you discover you should have filed Form 8960 but didn't, or if you made calculation errors on the original form, you'll need to file an amended return using Form 1040-X (for individuals) along with a corrected Form 8960. Generally, you have three years from the date you filed your original return, or two years from when you paid the tax (whichever is later), to file an amended return claiming a refund. However, if you owe additional NIIT, you should file an amended return as soon as you discover the error to minimize interest and potential penalties. IRS.gov - Instructions for Form 8960
Late Filing
Late Filing: If you're filing your entire tax return late, Form 8960 must be included with that late return. Missing Form 8960 when it's required can trigger IRS notices and potential penalties, particularly if you owe additional tax. The penalty structure follows the same rules as your main tax return—failure-to-file and failure-to-pay penalties may apply, plus interest on unpaid tax amounts.
Key Rules for 2025
Income Thresholds
Income Thresholds: The NIIT applies only when your MAGI exceeds these threshold amounts, which are not indexed for inflation and remain the same year after year:
- Married Filing Jointly or Qualifying Surviving Spouse: $250,000
- Married Filing Separately: $125,000
- Single or Head of Household: $200,000
- Estates and Trusts: For 2024, the threshold was $15,200 (the point where the highest tax bracket begins). The 2025 threshold will be published in an IRS revenue procedure, typically announced each fall.
Calculating Your Tax
Calculating Your Tax: You pay 3.8% on the lesser of two amounts: (1) your net investment income, or (2) the amount by which your MAGI exceeds the applicable threshold. This means even if you have substantial investment income, you only pay the NIIT on the portion of your income exceeding the threshold. IRS.gov - Topic 559
What Counts as Net Investment Income
What Counts as Net Investment Income: Investment income includes interest, dividends, capital gains, rental and royalty income, non-qualified annuities, and income from passive business activities or trading financial instruments. You can reduce this gross investment income by deductions properly allocable to it, such as investment interest expense, advisory fees, rental property expenses, and state/local income taxes attributable to investment income.
Special Situations
Special Situations: Real estate professionals who materially participate in rental activities for more than 500 hours during the year may qualify for a safe harbor that excludes their rental income from NIIT. Gain from selling your primary residence remains excluded up to $250,000 ($500,000 for married couples filing jointly) under Section 121, just as with regular income tax. Nonresident aliens are generally not subject to NIIT. IRS.gov - Questions and Answers on NIIT
Step-by-Step (High Level)
Part I – Investment Income
Part I – Investment Income (Lines 1-8): Start by totaling your various types of investment income. Report taxable interest (line 1), ordinary dividends (line 2), annuity income (line 3), and income from rental real estate, partnerships, S corporations, or trusts (line 4a). On line 4b, subtract any net income from non-passive businesses or trades. Lines 5a through 5d handle capital gains and losses, with adjustments for gains that aren't subject to NIIT (such as those from active businesses). Line 6 makes adjustments for certain foreign corporation income. Line 7 allows other modifications, including properly allocable NOL deductions. Line 8 gives you your total gross investment income.
Part II – Investment Expenses
Part II – Investment Expenses (Lines 9-12): Next, calculate deductions properly allocable to your investment income. These might include investment interest expense (line 9a), state and local income taxes (line 9b), and miscellaneous investment expenses (line 9c). Line 10 handles additional modifications, including adjustments for traders and AGI-limited deductions. Subtract your total allowable deductions (line 11) from your gross investment income (line 8) to arrive at your net investment income on line 12.
Part III – Tax Computation
Part III – Tax Computation (Lines 13-21): The calculation differs for individuals versus estates and trusts. Individuals complete lines 13-17, starting with MAGI (line 13), entering the threshold for their filing status (line 14), and calculating the excess (line 15). Line 16 takes the lesser of net investment income or the excess over the threshold. Line 17 multiplies this by 3.8% to determine the tax owed. Estates and trusts complete lines 18a-21, accounting for distributions to beneficiaries and charitable deductions, then calculating the tax based on their undistributed net investment income and AGI exceeding their threshold amount.
Common Mistakes and How to Avoid Them
Mistake #1: Not Filing When Required
Mistake #1: Not Filing When Required: Many taxpayers don't realize they need Form 8960 because they're accustomed to their regular tax return. Solution: If your MAGI exceeds the threshold for your filing status and you have any investment income, check whether Form 8960 is needed. Tax software typically catches this, but if preparing by hand or using simpler methods, review your investment income carefully.
Mistake #2: Misclassifying Passive vs. Active Income
Mistake #2: Misclassifying Passive vs. Active Income: The most complex aspect of Form 8960 involves determining whether business income is passive (subject to NIIT) or from material participation in an active business (generally not subject to NIIT). Solution: Keep detailed records of hours spent in business activities. The IRS defines ""material participation"" with specific tests, including the common 500-hour rule. Document your involvement throughout the year.
Mistake #3: Incorrectly Calculating Rental Income
Mistake #3: Incorrectly Calculating Rental Income: Many assume all rental income escapes NIIT if they're real estate professionals, but you must also materially participate in the specific rental activity and, ideally, meet the 500-hour safe harbor. Solution: Track time spent on each rental property separately. If you're a real estate professional, consider whether making a Regulations Section 1.469-9(g) election to treat all rental properties as a single activity makes sense for your situation.
Mistake #4: Missing Partnership and S Corporation Adjustments
Mistake #4: Missing Partnership and S Corporation Adjustments: When selling partnership interests or S corporation stock, the gain reported on your tax return may need adjustment on line 5c to exclude the portion attributable to active business assets. Solution: Request a statement from the partnership or S corporation detailing the components of your gain. Keep this documentation with your tax records.
Mistake #5: Forgetting About Principal Residence Exclusion
Mistake #5: Forgetting About Principal Residence Exclusion: Taxpayers sometimes incorrectly include the excluded gain from selling their home in net investment income. Solution: Remember that the $250,000/$500,000 exclusion under Section 121 applies for NIIT purposes too. Only gains exceeding these amounts are potentially subject to the 3.8% tax.
Mistake #6: Improper Allocation of Deductions
Mistake #6: Improper Allocation of Deductions: Not all expenses that reduce your regular tax liability can offset net investment income. Solution: Carefully trace which deductions relate to investment income versus other income sources. State income taxes, for example, must be allocated between investment and non-investment income.
Mistake #7: Overlooking Estimated Tax Requirements
Mistake #7: Overlooking Estimated Tax Requirements: Since Form 8960 creates additional tax liability, taxpayers sometimes underpay estimated taxes. Solution: Include your projected NIIT when calculating quarterly estimated tax payments to avoid underpayment penalties. Use the Tax Withholding Estimator on IRS.gov or adjust your W-4 to increase withholding if you're an employee.
What Happens After You File
Processing
Processing: The IRS processes Form 8960 along with your main tax return. The NIIT amount from Form 8960, line 17 (individuals) or line 21 (estates and trusts) carries to your Form 1040 or Form 1041. This tax is paid with your regular income tax, and you cannot use certain tax credits (like foreign tax credits or general business credits) to offset the NIIT, as these credits apply only to Chapter 1 income tax.
Payment
Payment: If you owe NIIT and didn't pay enough through withholding or estimated taxes, you must pay the balance by your return's due date (including extensions) to avoid interest charges. The IRS charges interest on unpaid balances from the original due date, currently at rates adjusted quarterly. You can pay electronically through IRS Direct Pay, credit/debit card, or through an installment agreement if you cannot pay in full.
Refunds
Refunds: Unlike some taxes, the NIIT doesn't have separate withholding. If you overpaid your total tax liability (including NIIT), you'll receive a refund according to normal IRS processing timelines—typically within 21 days for electronically filed returns with direct deposit.
IRS Review
IRS Review: The IRS may select your return for examination, particularly if your Form 8960 contains unusual items or significant adjustments. Keep supporting documentation for at least three years (longer for certain situations). For Form 8960 specifically, retain records showing how you calculated passive versus active income, material participation hours, basis in property sold, and allocations of deductions between investment and non-investment income.
Correspondence
Correspondence: If the IRS has questions about your Form 8960, you'll receive a notice requesting additional information or proposing changes. Respond promptly with documentation supporting your positions. Common inquiry areas include material participation determinations, real estate professional status, and adjustments for partnership/S corporation sales.
FAQs
Do I owe both the 3.8% Net Investment Income Tax and the 0.9% Additional Medicare Tax?
Is the gain from selling my home subject to the Net Investment Income Tax?
Can I use my foreign tax credit to reduce my Net Investment Income Tax liability?
Does the Net Investment Income Tax apply to my IRA or 401(k) distributions?
If I'm a real estate professional, is my rental income automatically exempt from the Net Investment Income Tax?
As an estate or trust, how do distributions to beneficiaries affect the Net Investment Income Tax?
What if I sold my partnership interest or S corporation stock—how is that treated for the Net Investment Income Tax?
This summary is based on official IRS guidance available at IRS.gov. For complete details, see Form 8960, Instructions for Form 8960, and Topic No. 559. Tax situations vary widely, so consult a qualified tax professional for advice specific to your circumstances.
