What Form 8960 Is For
Form 8960 is used to calculate the net investment income tax, which applies when your modified adjusted gross income exceeds certain thresholds and you earn investment income. This additional tax focuses on amounts considered net investment income, such as capital gains, dividend income, interest income, royalty income, rental income, net rental income, and income from trading financial instruments.
Taxpayers must complete the tax form when the applicable threshold amount is exceeded for their filing status. This subsection includes individuals, estates, and trusts with total investment income above the statutory threshold amounts for the tax year.
When You’d Use Form 8960
Taxpayers use Form 8960 when their modified adjusted gross income rises above the filing status MAGI threshold, and they also earn income that is considered net investment income. This includes individuals married and filing jointly, married and filing separately, qualifying widows, qualifying surviving spouses, and single taxpayers.
Late or amended returns must still include this form when required by the tax year. If your gross income changes or you revise investment income amounts, you must file an amended tax return to correct your NIIT liability.
Key Rules or Details for 2025
- Thresholds for filing: The net investment income tax applies when your modified adjusted gross income exceeds your applicable threshold. These threshold amounts vary by filing status and remain unchanged across tax years beginning after enactment.
- Income subject to NIIT: Investment income includes capital gains, dividend income, interest income, net rental income, royalty income, mutual funds, municipal bonds, and passive income from a pass-through entity.
- Excluded income rules: Certain types of income, including wages, self-employment income, Social Security benefits, and unemployment compensation, are excluded and are not considered net investment income for NIIT calculations.
- Deduction limitations: Only deductible expenses directly tied to investment income, such as brokerage fees, related fees, and certain local income taxes, can be used to reduce net investment income.
- Special taxpayer situations: Real estate professionals who materially participate in rental property activities may qualify for exceptions when their investment income includes rental real estate income.
Browse more tax form instructions and filing guides in our Forms Hub.
Step-by-Step (High Level)
Step 1: Calculate investment income
You begin by identifying all forms of investment income for the tax year. This includes capital gains, dividend income, interest income, rental income, royalty income, and amounts from financial instruments. You calculate total investment income by subtracting deductible expenses from the total investment income.
Step 2: Subtract deductible expenses
You subtract deductible expenses directly associated with earning investment income. These may include brokerage fees, related fees, tax loss harvesting adjustments, and local income taxes allocated to investment income. This step determines the amount considered net investment income.
Step 3: Compare MAGI to the threshold
You calculate your modified adjusted gross income and compare it to your applicable threshold amount. The tax applies only when your MAGI exceeds the statutory threshold for your filing status based on dollar amount limits.
Step 4: Determine NIIT liability
To calculate the net investment income tax, apply the additional tax rate to either your net investment income or the amount by which your MAGI exceeds the threshold, whichever is less. This amount becomes your NIIT liability for tax purposes.
Step 5: Complete and attach the form
You enter all calculated figures on Form 8960 and attach the completed tax form to your individual, estate, or trust income tax return. You ensure accuracy so your income taxes and tax liability reflect the correct NIIT calculation.
Learn more about federal tax filing through our IRS Form Help Center.
Common Mistakes and How to Avoid Them
- Incorrectly assuming certain income is investment income: Some taxpayers mistakenly assume self-employment income or wages are considered net investment income. You can avoid this by reviewing IRS rules to ensure that only investment income is included, such as categories like capital gains or passive activities.
- Ignoring deductible expense limitations: Many taxpayers try to subtract expenses not allowed for NIIT purposes. You can avoid this by limiting deductions to brokerage fees, related fees, and local income taxes directly tied to investment activity.
- Misunderstanding rental property rules: Taxpayers often treat rental real estate income as exempt because they materially participate. You can avoid this by confirming whether you qualify as a real estate professional before excluding rental income from your tax return.
- Incorrectly comparing MAGI to thresholds: Some filers use adjusted gross income instead of modified adjusted gross income. You can avoid this by recalculating MAGI accurately for your filing status threshold.
- Overlooking estate and trust rules: Estates and trusts sometimes fail to account for undistributed net investment income. You can avoid this by following the specific estate and trust calculation rules that determine 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
Once you file Form 8960 with your tax return, the IRS reviews your entries to confirm that your modified adjusted gross income and total investment income calculations meet the applicable reporting standards. If the IRS identifies discrepancies involving your NIIT liability or filing status, you may receive a notice asking for clarification.
Refunds or payments are processed in accordance with standard income tax procedures. You should keep documentation for all investment income, deductible expenses, and gross income amounts in case the IRS requests supporting records for tax purposes.
FAQs
What does IRS Form 8960 2025 require for calculating net investment income?
IRS Form 8960 for 2025 requires taxpayers to calculate 8960 net investment income by determining investment income, subtracting deductible expenses, and comparing modified adjusted gross income to applicable thresholds to compute NIIT liability.
How does adjusted gross income affect NIIT under Form 8960?
Adjusted gross income affects the calculation because your modified adjusted gross income determines whether your MAGI exceeds the threshold amount, which triggers the net investment income tax calculation.
How does Form 8960 treat capital gains for income tax purposes?
Form 8960 includes capital gains as investment income, and these amounts are incorporated in the NIIT calculation when your MAGI exceeds the threshold based on your filing status.
How do financial instruments or commodities affect estates and trusts on Form 8960?
Income from financial instruments or commodities increases NIIT liability for estates and trusts when undistributed net investment income exceeds the threshold amounts for individual estates and trusts.
How does filing status determine gross income thresholds for Form 8960?
Your filing status determines which gross income threshold applies, such as married filing jointly, married filing separately, single, or qualifying surviving spouse, which affects whether your MAGI exceeds NIIT limits.
How does net investment income differ from income tax calculations for individuals, estates, and trusts?
The 8960 net investment income calculation is separate from regular income tax because it focuses solely on investment income categories and applies only when MAGI thresholds are exceeded.
