Draft Form 8960 Released - The Net Investment Income Tax (NIIT)

August 16, 2013 | Roger McEowen

The IRS has recently released Draft Form 8960, the Form that will be used to report income subject to the NIIT effective for tax years beginning after 2012.  The NIIT applies to “passive” sources of income for individuals with modified adjusted gross income (MAGI) above a threshold amount.  The tax applies to the lesser of “net investment income” or the excess (if any) of a taxpayer’s MAGI over $200,000 for single filers and $250,000 for joint filers.  Passive or “investment” sources of income that are subject to the tax include:

  • Interest that is not derived in the ordinary course of a trade or business
  • Dividends Rents
  • Non-qualified annuities (to the extent taxable)
  • Royalties
  • Capital gains (unless the gain results from the sale of an active business)
  • Passive trade or business income
  • Gain on the sale of an active interest in a C corporation
  • Gain on the sale of a principal residence (above the amount otherwise excluded)

There are some special rules that apply, and some unique planning implications as a result of the tax.  For instance, while IRA distributions are generally not subject to the surtax, an IRA distribution can increase a taxpayer’s MAGI which could, in turn, make some of a taxpayer’s other “investment” income subject to the tax.  The same can be said for Roth IRA conversions – it will increase a taxpayer’s MAGI. 

So, to determine if the NIIT applies to a taxpayer, a couple of calculations will have to be made.  MAGI will have to be computed, and if it is over the applicable threshold, the sources of “passive” income will also have to be computed. 

As for the Form itself, it has three parts.  Part 1 involves the computation of investment income. Part II details investment expenses allocable to investment income and various modifications.  Part III is the tax computation.  The Draft Form is a single page with 21 lines. 

There still aren’t final regulations on the NIIT (proposed regulations were issued last December), and the IRS says in a “caution” attached with the Draft Form 8960 that the Form should not be read as giving any clues as to what the final regulations might be like.  Interesting, on line 4a of the Draft form, income from “rental real estate” must be listed, but no mention is made of income from personal property leases.  Under I.R.C. §1402, rents from real estate and personal property leased with real estate are not subject to self-employment tax.  So, it would seem that real estate rents and personal property that is leased with real estate would both be “investment income.”  That’s an interesting omission.  Another interesting item to note is line 5a.  That line asks the taxpayer to report the net gain or loss from the disposition of property from Form 1040.  By including a net loss, that seems to allow a net loss to offset various categories of investment income.  The Preamble to the proposed regulations issued last December say that you can’t do that.  So, these questions will need to be cleaned up in the final regulations. 

Of course, we will focus on the NIIT as part of Day 2 of the CALT September seminar in Ames.  There are some interesting planning ploys that can be put in place to minimize or eliminate the impact of the NIIT.

Download Form 8960.pdf

Draft Instructions for Form 8960 can be found here.