Form 8960: Understanding the Net Investment Income Tax
This article is for informational purposes only and does not constitute legal advice.
Always consult with a tax professional for your specific circumstances.
Form 8960 may sound like just another tax form, but for high-income earners, it’s a key document.
If you’ve got rental income, dividends, or capital gains and your earnings exceed a certain threshold, this form likely has your name on it.
Let’s break it down so you can tackle it with confidence – and maybe even save a little on taxes.
What is Form 8960, and why does it matter?
Form 8960 is how taxpayers calculate and report the Net Investment Income Tax (NIIT).
Introduced under the Affordable Care Act, NIIT applies to individuals, estates, and trusts with significant income from investments.
The tax is designed to ensure that high-income earners contribute toward Medicare, even on non-wage income.
The rate?
A flat 3.8% on the lesser of:
- Net Investment Income (NII): Income from investments like interest, dividends, and rental income, reduced by eligible expenses.
- Modified Adjusted Gross Income (MAGI): Income exceeding specific thresholds, based on your filing status.
By addressing these two components, the form ensures accurate reporting and calculation of your NIIT liability.
Do you need to file Form 8960?
Thresholds for individuals
You must file Form 8960 if your MAGI exceeds the following thresholds:
- $200,000: Single or Head of Household;
- $250,000: Married Filing Jointly or Qualifying Widow(er);
- $125,000: Married Filing Separately.
Estates and trusts
For estates and trusts, Form 8960 is required if their undistributed net income exceeds $14,450 in 2025.
What counts as net investment income?
The IRS defines net investment income broadly, including:
- Interest: Income from savings accounts, CDs, and bonds.
- Dividends: Payments from stocks or mutual funds.
- Capital gains: From selling investments or real estate (excluding your primary home if the sale qualifies for the exclusion).
- Rental income: Income earned from properties, minus deductible expenses.
- Royalty income: From intellectual property, natural resources, or licensing deals.
- Passive income: Earnings from businesses where you’re not actively involved.
What doesn’t count?
- Wages or self-employment income.
- Retirement plan distributions (e.g., IRAs, 401(k)s).
- Social Security benefits.
NB! Just because income is "passive" doesn’t mean it’s exempt. If you’re earning money while sipping margaritas on the beach, NIIT might apply.
Breaking down Form 8960 (instructions)
Form 8960 is divided into three parts:
Part I: Investment Income
- Line 1: Report all sources of investment income. Include interest, dividends, and capital gains.
- Line 4: Subtract expenses directly related to earning investment income (e.g., brokerage fees, state taxes).
- Line 8: Total your net investment income (NII).
Example: If you earned $30,000 in dividends and paid $3,000 in related fees, your NII is $27,000.
Part II: Deductions
This section focuses on deductions that reduce NII.
Eligible expenses include:
- Investment interest expenses: Paid on loans used to acquire taxable investments.
- State and local taxes: Allocated to investment income.
- Casualty and theft losses: From investment property.
Part III: Tax Computation
This is where you calculate the 3.8% NIIT:
- Line 9: Enter your MAGI from Form 1040.
- Line 12: Subtract the applicable threshold ($200,000 for single, $250,000 for joint filers).
- Line 16: Compute the 3.8% NIIT based on the lesser of your NII or MAGI exceeding the threshold.
Example: If your MAGI exceeds $250,000 by $50,000 and your NII is $40,000, you’ll pay NIIT on $40,000: $40,000 × 3.8% = $1,520.
Form 8960 preview
NIIT thresholds vs. income types
| Category | Threshold (MAGI) | Subject to NIIT? |
|---|---|---|
| Single | $200,000 | Yes, if NII > $200,000 |
| Married filing jointly | $250,000 | Yes, on the lesser of NII or excess MAGI above threshold |
| Retirement income | N/A | No, distributions from IRAs or 401(k)s are excluded |
| Rental income | N/A | Yes, unless excluded by tax treaties or business deductions |
Key strategies to reduce NIIT liability
1. Harvest capital losses
Offset gains by strategically selling underperforming investments. This process, known as tax-loss harvesting, reduces your net capital gains and, in turn, your NII.
Pro tip: Plan your sales toward the end of the year to align with your overall tax strategy.
2. Invest in tax-exempt securities
Interest from municipal bonds is excluded from both NII and federal income tax. This makes them a double win for reducing tax liability.
Consider diversifying your portfolio with municipal bonds to minimize exposure to NIIT.
3. Contribute to retirement accounts
Increasing contributions to 401(k)s, IRAs, or SEP IRAs reduces your taxable income and MAGI.
Since MAGI determines whether NIIT applies, these contributions can potentially eliminate NIIT entirely.
Pro tip: Take full advantage of employer-matching contributions for added savings.
4. Monitor rental property expenses
Deduct all allowable expenses, such as maintenance, repairs, depreciation, and property management fees.
These deductions reduce your net rental income, lowering both your overall taxable income and your NII.
Pro tip: Keep detailed records to ensure you claim every eligible deduction.
5. Optimize income timing
If your income is close to the MAGI threshold, consider deferring income (e.g., bonuses or capital gains) to the next tax year to stay under the limit and avoid NIIT for the current year.
NOTE! By using these strategies thoughtfully, you can significantly reduce or even eliminate your exposure to the NIIT while maximizing tax efficiency.
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Bottom line
Form 8960 may not be the most glamorous tax form, but understanding it can save you serious money.
By knowing what counts as investment income, how to calculate deductions, and strategies to reduce your liability, you can navigate NIIT like a pro.
FAQ
Yes, if you’re an expat or have foreign investments, you may be able to reduce your Net Investment Income Tax by claiming a Foreign Tax Credit (FTC) for taxes paid on foreign investment income. However, this requires coordination between Form 8960 and Form 1116 to ensure proper application.
Not always. Rental income is excluded from NIIT if it qualifies as part of a non-passive trade or business under IRS rules. To qualify, you must materially participate in the property’s management (e.g., handling leasing or maintenance) rather than delegating these tasks to others.
The IRS may assess penalties and interest on unpaid taxes. It’s essential to attach Form 8960 to your return if required.
NIIT is a federal tax, so state taxes don’t directly affect it. However, you can deduct state and local taxes attributable to investment income when calculating Net Investment Income (NII), which can lower your NIIT liability.
No, life insurance death benefits are generally excluded from both NII and federal income tax. However, interest earned on life insurance proceeds held by the insurer may be considered investment income and subject to NIIT.
Potentially, yes. If your spouse’s income is below the NIIT threshold, transferring income-generating assets could reduce your combined exposure. However, this strategy requires careful planning to avoid unintended tax consequences, like gift tax obligations.
Inherited investments may be subject to NIIT if they generate income that meets the criteria for NII. However, inherited assets typically receive a step-up in basis, which can reduce or eliminate taxable gains if sold shortly after inheritance.