Form 8960 - Net Investment income Tax
Form 8960
Net Investment Income Tax
Bio: Alistair is a chartered accountant with over 20 years of experience dealing in U.S. and U.K. taxation.
Article
March 2025
10 Minute Read
What Is Form 8960 and the Net Investment Income Tax?
Form 8960 is used to report and calculate the Net Investment Income Tax (NIIT), a 3.8% tax on certain investment income for high earners. This tax applies to individuals, estates, and trusts with investment income exceeding IRS thresholds and is separate from regular income tax obligations.
Why Was the Net Investment Income Tax Introduced?
The Net Investment Income Tax (NIIT) was introduced as part of the Affordable Care Act (ACA) in 2013 to help fund Medicare expansion. Unlike Social Security and Medicare payroll taxes, which only apply to earned income (wages and self-employment earnings), the NIIT was designed to ensure that high-income taxpayers also contribute to Medicare through investment earnings. The 3.8% tax applies to passive income sources such as capital gains, rental income, dividends, and interest if a taxpayer’s income exceeds certain thresholds.
NIIT vs. Regular Income Tax – What’s the Difference?
Additional Tax, Not a Replacement – NIIT is an extra tax on investment income, not a substitute for ordinary income tax.
Applies Only to High Earners – NIIT only applies if an individual's modified adjusted gross income (MAGI) exceeds IRS thresholds ($200,000 for single filers, $250,000 for married filing jointly).
Targeted Investment Income – Unlike regular income tax, which applies to wages and business income, NIIT applies only to passive investment income.
Cannot Be Offset by Foreign Tax Credits (FTC) – Unlike standard income tax, NIIT is classified as a Medicare tax, meaning Foreign Tax Credits cannot reduce or eliminate it.
Who Needs to File Form 8960?
Net Investment Income Tax (NIIT) Thresholds by Filing Status
The Net Investment Income Tax (NIIT) applies to high-income individuals, estates, and trusts that exceed IRS income thresholds. This tax is not indexed for inflation, meaning more taxpayers may become subject to it over time as incomes rise.
Below are the IRS income thresholds at which the 3.8% NIIT applies:
| Single | Married Filing Jointly | Married Filing Separately | Head of Household | Trust & Estates |
|---|---|---|---|---|
| $200,000 | $250,000 | $125,000 | $200,000 | $14,450 |
These thresholds do not adjust for inflation, meaning more taxpayers could become subject to NIIT in the future.
Even if your income fluctuates, one large capital gain, dividend payout, or rental income spike can push you above the threshold, triggering NIIT.
What Happens If You Exceed the NIIT Threshold?
Once your Modified Adjusted Gross Income (MAGI) exceeds the threshold, NIIT applies as follows:
NIIT is calculated at 3.8% on the lesser of:
Your net investment income (NII)
The amount by which your MAGI exceeds the threshold
Example Scenario:
If a single filer has a MAGI of $230,000 and $50,000 in net investment income, the NIIT is applied to $30,000 (the amount over the $200,000 threshold), resulting in a tax of $1,140.
For trusts and estates, NIIT applies to all net investment income above $14,450, making it especially impactful for inherited wealth and estate planning.
Breaking Down Net Investment Income (NII)
What Income Is Subject to NIIT?
The Net Investment Income Tax (NIIT) applies to passive income sources, impacting high-income earners with significant investment earnings. Understanding which income types are subject to NIIT is essential for tax planning.
The 3.8% NIIT applies to the following types of investment income:
Interest – Earnings from savings accounts, bonds, CDs, and treasury securities.
Dividends – Includes both qualified and non-qualified dividends from stock investments.
Capital Gains – Profit from the sale of stocks, real estate, cryptocurrency, and other assets.
Rental Income – Profits from investment properties after deductions for expenses.
Royalties & Annuities – Passive earnings from intellectual property, book royalties, or annuity payments.
NIIT applies only if total modified adjusted gross income (MAGI) exceeds the threshold ($200,000 for single filers, $250,000 for married filing jointly).
What Income Is Excluded from NIIT?
Certain income types are NOT subject to NIIT, including:
Wages and Salaries – Earned income from employment or self-employment.
Active Business Income – Income from businesses where the taxpayer actively participates.
Social Security Benefits – Retirement and disability payments are exempt from NIIT.
Tax-Exempt Bond Interest – Interest earned from municipal bonds or other tax-exempt investments.
Example Scenarios – How NIIT Applies in Real Life
Case Study 1: Selling an Investment Property with a Large Capital Gain
John, a single filer, sells a rental property for a profit of $150,000. His Modified Adjusted Gross Income (MAGI) is now $300,000, exceeding the $200,000 NIIT threshold. NIIT applies to the lesser of his investment income or the amount exceeding the threshold, meaning:
$100,000 of his capital gain is subject to NIIT (since $300,000 - $200,000 = $100,000).
NIIT tax owed: 3.8% of $100,000 = $3,800.
Case Study 2: High-Income Investor with Dividends & Rental Income
Lisa, a married taxpayer filing jointly, earns:
$60,000 from qualified dividends
$40,000 in rental income (after deductions)
Total MAGI: $280,000 (above the $250,000 NIIT threshold for joint filers)
Since Lisa’s MAGI exceeds the NIIT threshold by $30,000, and her total investment income is $100,000, NIIT applies to the lesser of the two.
NIIT applies to $30,000 of investment income.
NIIT tax owed: 3.8% of $30,000 = $1,140.
How NIIT Affects U.S. Expats and Foreign Investment Income
Many U.S. expats mistakenly assume that living abroad exempts them from the Net Investment Income Tax (NIIT). However, foreign investment income is still subject to NIIT, and expats must carefully manage dual taxation risks to avoid unexpected tax liabilities.
Does NIIT Apply to Foreign Investments?
Yes, foreign investment income is subject to NIIT if a taxpayer's Modified Adjusted Gross Income (MAGI) exceeds the IRS thresholds ($200,000 for single filers, $250,000 for married filing jointly). This includes:
Capital gains from foreign real estate sales
Dividends from foreign stocks
Rental income from overseas properties
Interest earned in foreign bank accounts
Although expats may use tax treaties and Foreign Tax Credits (FTC) to offset some U.S. tax liability, FTC does not reduce NIIT, as NIIT is classified as a Medicare tax rather than a standard income tax.
Why the Foreign Earned Income Exclusion (FEIE) Does Not Apply to NIIT
Many expats use the Foreign Earned Income Exclusion (FEIE) to exclude up to $120,000+ (2024) of foreign wages or self-employment income from U.S. taxation. However:
FEIE applies only to earned income, such as salaries and wages.
NIIT applies only to passive investment income, meaning FEIE cannot be used to exclude capital gains, rental income, or dividends.
Even if an expat qualifies for FEIE, their investment income may still be subject to NIIT if MAGI exceeds the NIIT threshold.
Dual Taxation Risks on Foreign Investments
Because NIIT applies to worldwide investment income, U.S. expats often face double taxation on foreign investments. Risks include:
Foreign capital gains may be taxed in both the U.S. and the country of residence.
Dividends from foreign stocks may be subject to foreign withholding tax plus NIIT in the U.S.
Rental income from overseas properties is taxable in both jurisdictions, even after deductions.
While the Foreign Tax Credit (FTC) can help reduce standard income tax liability, it does not offset NIIT, meaning expats could still owe 3.8% NIIT on their foreign investment income even after paying foreign taxes.
Example: An Expat Investor Facing NIIT on Overseas Investments
Sarah, a U.S. citizen living in the UK, earns:
$50,000 in foreign salary (excluded using FEIE)
$30,000 in rental income from a UK property
$20,000 in dividends from foreign stocks
Total MAGI: $270,000 (exceeding the $200,000 NIIT threshold for single filers)
Since Sarah's passive investment income totals $50,000, NIIT applies to the lesser of:
The amount by which her MAGI exceeds the NIIT threshold ($70,000 in excess income)
Her total Net Investment Income ($50,000)
Sarah's NIIT tax liability: 3.8% of $50,000 = $1,900.
Even though Sarah excludes her salary using FEIE, her investment income is still taxed under NIIT, increasing her total tax burden.
Foreign Tax Credits (FTC) and NIIT – What You Need to Know
The Foreign Tax Credit (FTC) helps reduce double taxation for U.S. taxpayers earning foreign income, but FTC does not apply to the Net Investment Income Tax (NIIT). Understanding why FTCs cannot offset NIIT and exploring tax planning strategies can help minimize tax exposure.
Why Foreign Tax Credits Cannot Offset NIIT
NIIT is a Medicare tax, not a standard income tax – The 3.8% NIIT is classified as a Medicare surtax rather than an income tax, meaning it falls outside the scope of foreign tax credit eligibility.
FTC applies only to foreign income tax liabilities – While FTC can offset U.S. tax liability on foreign-earned wages and business income, it cannot be used to reduce NIIT owed on foreign investment income.
Double taxation risks remain – Expats earning investment income abroad may still be taxed on their capital gains, dividends, or rental income in both the U.S. and their country of residence, even if they claim FTC for standard U.S. income tax liability.
Tax Planning Strategies to Minimize NIIT Exposure
Even though FTC cannot reduce NIIT, there are legal strategies to lower NIIT liability:
Structuring Investments in Tax-Advantaged Accounts
Invest in IRAs, 401(k)s, and other retirement accounts to defer taxes on investment income.
Consider Health Savings Accounts (HSAs) and 529 education savings plans, which are not subject to NIIT.
Diversifying Investments to Reduce Taxable Gains
Hold long-term investments to benefit from lower capital gains tax rates.
Offset capital gains by harvesting investment losses, reducing the total amount subject to NIIT.
Invest in municipal bonds, as interest from these investments is exempt from both regular income tax and NIIT.
Relocating to a Jurisdiction with No Investment Tax
Some U.S. states do not impose state-level NIIT, meaning relocating could lower overall tax liability.
Expats moving to a jurisdiction with favorable tax treaties can reduce foreign tax burdens on investment income.
Structuring investments in a tax-friendly location may help shield capital gains and dividend income from excessive taxation.
Step-by-Step Guide to Filing Form 8960
Filing Form 8960 is essential for taxpayers subject to the Net Investment Income Tax (NIIT). Follow this four-step process to ensure compliance with IRS regulations and accurately calculate your NIIT liability.
Step 1: Calculate Your Total Net Investment Income
To determine if you owe NIIT, you must first calculate your Net Investment Income (NII). Include:
Capital gains from the sale of stocks, real estate, and cryptocurrency.
Dividends (qualified and non-qualified).
Rental income (after deductions for expenses and depreciation).
Interest income from savings accounts, bonds, and CDs.
Royalties and annuities from intellectual property or investment-based sources.
Ensure all investment income sources are correctly reported before moving to the next step.
Step 2: Determine If You Exceed the NIIT Threshold
Compare your Modified Adjusted Gross Income (MAGI) to the IRS income thresholds.
If your MAGI is below the threshold → You do not owe NIIT.
If your MAGI exceeds the threshold → Move to Step 3 to calculate your NIIT liability.
Step 3: Multiply Excess NII by the 3.8% Tax Rate
NIIT applies to the lesser of:
Your total Net Investment Income (NII)
The amount by which your MAGI exceeds the NIIT threshold
Example Calculation:
MAGI: $275,000 (Single filer, exceeding threshold by $75,000)
Net Investment Income: $50,000
NIIT applies to the lesser amount ($50,000)
NIIT tax owed: 3.8% of $50,000 = $1,900
Step 4: Report and File with Form 1040
Once NIIT is calculated, you must report it on Form 8960 and transfer the tax liability to your Form 1040.
Attach Form 8960 to your federal tax return (Form 1040, Line 12).
Ensure accurate reporting of all investment income sources.
File by April 15 (or request an extension if necessary).
For large investment income, consider estimated tax payments to avoid penalties.
Common Mistakes to Avoid When Filing Form 8960
Filing Form 8960 correctly is essential to avoid IRS penalties and unnecessary tax liability. Many taxpayers make avoidable mistakes that lead to incorrect NIIT calculations or missed deductions.
Who Must File a Form 8960?
Individuals with Modified Adjusted Gross Income (MAGI) exceeding $200,000 (single) or $250,000 (married filing jointly).
Trusts and estates with income over $14,450.
Anyone with significant investment income, including dividends, rental income, and capital gains.
Misclassifying Earned vs. Investment Income
A common mistake is misclassifying investment income as earned income, leading to incorrect tax calculations:
Wages, salaries, and self-employment earnings are NOT subject to NIIT.
Dividends, interest, capital gains, and rental income ARE subject to NIIT.
Passive business income may be taxable under NIIT, while active business income is exempt.
How to Avoid This Mistake:
Review IRS definitions of earned vs. investment income.
Ensure correct reporting of wages and investment income on Form 1040.
Use IRS guidelines for passive vs. active income classification.
Assuming Foreign Investment Income Is Tax-Free
Expats often assume foreign investment income is exempt from NIIT, leading to unexpected tax bills.
Foreign rental income, dividends, and capital gains are subject to NIIT if MAGI exceeds the threshold.
The Foreign Earned Income Exclusion (FEIE) does NOT apply to investment income.
Foreign Tax Credits (FTC) cannot be used to offset NIIT, as NIIT is considered a Medicare tax.
How to Avoid This Mistake:
Report all foreign investment income on Form 8960.
Understand that NIIT applies regardless of where the income is earned.
Plan for potential double taxation on foreign investment earnings.
Not Accounting for Capital Losses to Offset NIIT
Failing to account for capital losses can increase NIIT liability unnecessarily:
Net Investment Income Tax (NIIT) applies to net gains, meaning capital losses can reduce taxable investment income.
Taxpayers can deduct up to $3,000 per year in capital losses against ordinary income.
Unused capital losses can be carried forward to offset future gains.
How to Avoid This Mistake:
Use tax-loss harvesting to strategically reduce NIIT.
Track and report capital losses accurately to lower taxable investment income.
Ensure all realized capital gains and losses are correctly reported on Form 1040 and Form 8960.
When and How to Pay the Net Investment Income Tax
The Net Investment Income Tax (NIIT) must be paid in addition to regular income tax, and certain taxpayers may need to make estimated tax payments to avoid penalties.
When Is NIIT Due?
NIIT is due at the same time as your regular federal income taxes – typically April 15 for most taxpayers.
If you file an extension, your NIIT liability is still due on April 15, even if your tax return is filed later.
Trusts and estates with NIIT obligations must pay by April 15, unless they follow a fiscal year different from the calendar year.
How to Pay NIIT:
Include Form 8960 with your federal tax return (Form 1040 or Form 1041 for estates and trusts).
Pay online via the IRS Direct Pay portal or EFTPS (Electronic Federal Tax Payment System).
Use payroll withholding adjustments to cover NIIT obligations if investment income fluctuates.
Do You Need to Make Estimated Tax Payments for NIIT?
Certain taxpayers must make quarterly estimated tax payments to avoid IRS penalties, including:
Individuals who expect to owe at least $1,000 in total taxes after withholding and credits.
Self-employed individuals, investors, or retirees who receive substantial non-wage income.
Trusts and estates that expect to owe NIIT due to significant passive income.
Quarterly Estimated Tax Payment Deadlines:
| Payment Period | Due Date |
|---|---|
| January 1st - March 31st | April 15th |
| April 1st - May 31st | June 15th |
| June 1st - August 31st | September 15th |
| September 1st - December 31st | January 15th following year |
How to Avoid Estimated Tax Penalties:
Use the IRS Safe Harbor Rule – If you pay at least 90% of the current year’s tax or 100-110% of last year’s total tax liability, you can avoid underpayment penalties.
Adjust withholding on wages or retirement distributions to cover NIIT if needed.
Monitor capital gains events to determine if additional estimated payments are required.
Need More Help?
Contact us for expert tax support filing your Form 8960