IRS Form 8960

irs form 8960
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As you probably already know, there are multiple forms for reporting taxes in the US, and all of them have different filing requirements. In this brief review, we will provide you with useful tips and recommendations on reporting the Net Investment Income Tax (NIIT) correctly to the IRS.

Explaining the Tax and Its Purpose

The NIIT is applied to persons or entities that are involved in investing policy. It does not really matter if you invest professionally, but if you earn a certain amount from existing investments in the current financial year, these amounts will be subject to taxation. In this case, besides the regular income tax return, you will have to file Form 8960. The form is a bit tricky cause you need to calculate the net income first to knew if you actually need to file the completed form with the IRS.

Under the US legislation, the NIIT is withheld at a rate of 3,8%, which, in turn, is counted either from the smaller portion of your investment earnings or from modified adjusted gross income (shortly MAGI) amount. And you can only see the amount you owe the IRS in NIIT once you fill out the form and do the calculations. Thus, if you currently have investments you potentially can get income from, we strongly advise you to take a look at Form 8960 and its filing requirements.

Please note that your salary (or salaries) and self-employment earnings do not affect your investment income amount in any way. Therefore, you do not have to include any income other than that from net investment in your taxation report with this form.

Cases to Use Form 8960

Having investment earnings in itself does not automatically mean that you must pay taxes from it. The NIIT is considered an additional tax that applies to individuals who have earned their MAGI over a certain amount in the current accounting period. There is an accepted name for such an amount known as the “threshold,” and it directly depends on the filing status of the subject taxpayer. Please ensure to check the amended and revised application categories on the IRS official website regarding the accounting year you file for.

The filing status of the NIIT application may be one of the following:

  • Joint tax return or qualifying widow(er) status — MAGI should exceed 250,000 US dollars (as of publication date);
  • Separate tax return but performed by a married couple — MAGI should be over 125,000 US dollars;
  • Single tax return and the return filed by the head of household — MAGI should be indicated in the total value of 200,000 US dollars or less.

It is worth mentioning that MAGI is just another variation of the so-called AGI, which stands for the adjusted gross income. The latter is typically reported on the first page of the standard tax return form. Frankly, those amounts are often the same, but if it is not your case and the larger amount can directly influence the necessity of filing the 8960 Form, you should better consult with a tax professional.

If, after a calculation, you have discovered that your net investment income is $1 or less, you are exempt from filling out and submitting the 8960 Form.

How to Fill out Form 8960

First of all, you should obtain an up-to-date form template. We suggest using our latest from-building software to create an already customized PDF document and edit it online. It is very convenient, and it will save you plenty of time.

The form comprises three parts. The first part is dedicated to the various types of earnings that the IRS considers net investment income. The second part subtracts particular deductible costs that relate to investment income reported in the previous part. And part three contains respective information on tax computation. Let us follow the filing process step-by-step to learn how to complete the form correctly.

Introduce the Taxpayer

At the top of the form, you, as the taxpayer, need to indicate your full legal name as shown in your original tax return (or names, if it was a joint tax return) and Social Security Number (SSN).

step 1 - introduce the taxpayer - filling out irs form 8960

Indicate the Investment Income Type

As we have mentioned above, wages and self-employment earnings are not considered net investment income. Instead, the IRS identifies interest, dividends, monthly rental and lease payments (for the landlords), royalties, and profits from trading stocks as such income.

We strongly advise you to read the instructions on the official IRS website before you start to fill in any information in the first part of the form, as some of the terms may sound unfamiliar to you. Please note that you need to combine the amounts indicated in two or more other lines to fill in certain gaps.

step 2 - indicate the investment income type - filling out irs form 8960

Enter the Investment Expenses and Modifications

In Part II of the form, you need to indicate all the deductible income expenses and modifications. Let us specify that such expenses may cover the services of a financial adviser, federal and state income taxes, and brokerage fees. However, the IRS might recognize the interest rates you pay on funds as a deductible income cost in some cases.

For more details, please check with the IRS website. Other than that, fill in the necessary gaps with the corresponding cost amounts.

step 3 - enter the investment expenses and modifications - filling out irs form 8960

Calculate and Insert Net Investment Income

Of course, calculating your net investment income is the most significant part and the primary reason for filing the form. That is why you should be very careful when entering the amounts in this section. Follow the steps and instructions outlined here and use the previous sections to insert the necessary amounts. Note that you may also need your tax return form to insert certain information, so keep that somewhere at hand.

step 4 - calculate and insert net investment income - filling out irs form 8960

Refer to Tax Return Instruction (If Needed)

If you want to gain extra privacy on your investment income information, you need to comprise and file the Privacy Notice (under the Paperwork Reduction Act of 1995). It might be especially relevant to business entities that possess significant investments and do not want their competitors to find out any sensitive information. Under the Act, any authorities and entities will have to ask the IRS permission to request any investment-related information of the subject taxpayer.

See the tax return instruction to learn how to do that correctly.