What Form 8960 Is For
Form 8960 calculates the Net Investment Income Tax for individuals, estates, and trusts when investment income exceeds the applicable threshold amount. The Internal Revenue Service uses it to determine whether modified adjusted gross income and total net investment income create additional tax liability.
This form applies when investment income includes interest, dividends, capital gains, rental income, royalties, or other income subject to NIIT rules. Taxpayers with certain thresholds based on filing status must complete the form when their gross income and investment income rise above the filing status MAGI threshold.
When You’d Use Form 8960
You use Form 8960 when your adjusted gross income and investment income exceed your applicable threshold amount for your filing status. This applies to married couples filing jointly, married couples filing separately, qualifying surviving spouses, and individuals filing alone.
Estates and trusts must also file when undistributed net investment income exceeds the dollar amount where the highest tax bracket begins. Taxpayers filing late or amended returns must include Form 8960 for any tax year in which net investment income increases and affects overall income tax.
Key Rules or Details for 2010
- Form not applicable: Form 8960 does not apply to the 2010 tax year. It becomes relevant for tax years beginning in 2013 because the Education Reconciliation Act delays implementation.
- Tax not effective: The Net Investment Income Tax was not effective for 2010. Taxpayers owe no income tax related to NIIT for any 2010 income reported to the Internal Revenue Service.
- No filing requirement: Individuals, estates, and trusts are not required to file this form for the 2010 tax year. The Internal Revenue Service does not require NIIT calculations for income reported in that tax year.
- No considered net investment income: Investment income earned in 2010 is not considered net investment income for NIIT purposes. No amount of capital gains or dividend income triggers the tax.
Browse more tax form instructions and filing guides in our Forms Hub.
Step-by-Step (High Level)
Step 1: Determine if you must file
Determine whether your modified adjusted gross income exceeds the applicable threshold amount for your filing status. If your MAGI does not surpass this threshold amount, you do not incur any Net Investment Income Tax.
Step 2: Calculate total investment income
Add your total investment income using all income reported from financial instruments, mutual funds, rental property, and other investments. This includes interest income, dividend income, capital gains, net gain, and royalty income.
Step 3: Identify properly allocable deductions
Review your properly allocable deductions that offset investment income. These deductions include investment expenses, brokerage fees, fiduciary expenses, investment advisory costs, and local income taxes tied directly to your investments.
Step 4: Determine net investment income
Subtract properly allocable deduction amounts from total investment income. The resulting figure represents your net investment income, which the Internal Revenue Service uses to determine whether your tax liability increases.
Step 5: Compare MAGI to the threshold
Compare your modified adjusted gross income to your threshold amount for your filing status. The Internal Revenue Service taxes the lesser amount between net investment income and the excess MAGI figure.
Step 6: Calculate and report NIIT
Apply the 3.8 percent tax rate to the appropriate amount and determine your NIIT tax liability. Enter the resulting figure on your regular income tax return and complete all sections required by the form.
Learn more about federal tax filing through our IRS Form Help Center.
Common Mistakes and How to Avoid Them
- Incorrectly assuming applicability: Some taxpayers believe Form 8960 applies to 2010. You can avoid this confusion by confirming applicable tax years and reviewing Internal Revenue Service guidance for NIIT effective dates.
- Misidentifying income categories: Many taxpayers confuse business income with investment income. You can avoid this issue by reviewing whether investment income includes capital gains, rental income, dividend income, or other income subject to NIIT.
- Forgetting deductions: Some taxpayers forget properly allocable deductions that reduce total net investment income. You can avoid this mistake by reviewing investment interest expense, fiduciary expenses, and related miscellaneous itemized deductions.
- Misunderstanding thresholds: Taxpayers sometimes miscalculate their filing status MAGI threshold. You can avoid this error by confirming threshold amount requirements for married filing, surviving spouse, and other filing statuses.
- Misreporting excluded income: Some taxpayers incorrectly include excluded income like Social Security benefits or tax-exempt interest. You can avoid this problem by reviewing the excluded income rules and confirming what constitutes income subject to NIIT.
Learn more about how to avoid business tax problems in our guide on How to File and Avoid Penalties.
What Happens After You File
After you file Form 8960, the Internal Revenue Service reviews total investment income, properly allocable deductions, and your applicable threshold amount to verify accuracy. The agency may adjust your tax liability if improperly reported income or expenses affect your net investment income. If NIIT increases your taxable income or results in additional income taxes, the IRS reflects the changes in your notice. Amended returns must include revised calculations showing adjustments to net income, taxable income, and properly allocable deductions for affected tax years.
FAQs
Does Form 8960 2010 apply to individuals, estates, and trusts?
No, Form 8960 does not apply to any individuals, estates, or trusts for the 2010 tax year because the tax does not take effect until later years.
How is undistributed net investment income treated for tax years when NIIT applies?
Undistributed net investment income increases NIIT for estates and trusts when amounts exceed the dollar amount where the highest tax bracket begins.
Do financial instruments or commodities count toward net investment income?
Yes, net investment income includes income from trading financial instruments or commodities, provided that this income is derived from activities classified as investment income.
What is the highest tax bracket threshold for estates and trusts?
The highest tax bracket begins at a low dollar amount, and estates and trusts owe NIIT when undistributed net investment income exceeds this threshold amount.
What types of income does net investment income include for NIIT?
Net investment income includes interest income, dividend income, capital gains, rental income, royalty income, and other income subject to NIIT based on Internal Revenue Service guidance.
How does foreign income affect net income for NIIT purposes?
Foreign income is included in modified adjusted gross income, and certain types of foreign income may increase net income, depending on the reporting rules and exclusion requirements.
How does adjusted gross income affect the tax years subject to NIIT?
Adjusted gross income MAGI determines whether you exceed the applicable threshold amount for NIIT. Tax years with higher MAGI may increase exposure to additional income tax.
