This form helps taxpayers calculate the additional 3.8% tax that may apply when their modified adjusted gross income exceeds the applicable threshold and they have qualifying net investment income. Common examples include taxable interest, dividends, capital gains, and certain rental income.

If you earn income from investments, sell stocks, receive dividends, or collect rental income, you may have an additional federal tax obligation beyond your regular income tax. IRS Form 8960, Net Investment Income Tax—Individuals, Estates, and Trusts, helps calculate whether you owe the additional 3.8% Net Investment Income Tax, commonly called NIIT.

For taxpayers in Grand Rapids, Kentwood, Wyoming, and throughout West Michigan, understanding Form 8960 can be especially important when preparing a return involving investment portfolios, rental properties, or income from certain passive business activities.

AIM Financial helps individuals, families, landlords, and business owners understand IRS reporting requirements and prepare accurate tax returns.

What Is IRS Form 8960?

Form 8960 is used to calculate the Net Investment Income Tax established under federal tax law. The tax generally applies to individuals, estates, and trusts whose income exceeds certain thresholds and who have qualifying net investment income.

The tax rate is 3.8%, but it does not automatically apply to all investment income or to everyone who earns more than the threshold.

For individuals, the tax generally applies to the smaller of:

• Net investment income for the tax year; or
• The amount by which modified adjusted gross income exceeds the applicable threshold.

This means that both your income level and the type and amount of income you receive matter.

Who May Need to File Form 8960?

For individuals, the federal thresholds are based on filing status:

Filing status	NIIT threshold
Single	$200,000
Head of household	$200,000
Married filing jointly	$250,000
Married filing separately	$125,000
Qualifying surviving spouse	$250,000

These thresholds are generally not adjusted for inflation.

For example, a single taxpayer with modified adjusted gross income of $230,000 and net investment income of $20,000 has income $30,000 above the threshold. The NIIT calculation generally uses the smaller amount: $20,000 of net investment income. At 3.8%, the tax would be $760, assuming no other applicable adjustments.

By contrast, if the same taxpayer had $50,000 of net investment income, the amount above the income threshold would be only $30,000. The tax would generally be 3.8% of $30,000, or $1,140.

These examples illustrate the basic calculation. Actual results can depend on deductions, adjustments, special rules, and the details of the taxpayer’s income.

What Types of Income Can Be Subject to NIIT?

Not all income is treated the same way. Form 8960 helps determine which income belongs in the net investment income calculation.

1. Interest and dividends

Taxable interest from bank accounts, bonds, and other investments may be included in net investment income. Dividends from stocks and mutual funds may also count.

Tax-exempt interest generally is excluded from net investment income, although certain special rules can affect the broader calculation.

2. Capital gains from selling investments

If you sell stocks, mutual funds, bonds, or other investment assets for a gain, that gain may be subject to NIIT if you also meet the applicable income requirements.

For example, a taxpayer who sells appreciated stock and has a substantial salary may owe regular capital gains tax and potentially the additional 3.8% NIIT.

Not every gain is automatically included. Certain exclusions and special rules may apply, so the type of property and the nature of the transaction matter.

3. Rental and royalty income

Rental property income and royalty income may be included in net investment income. However, the treatment depends on the circumstances.

For example, rental income from a property that is treated as a passive activity may be subject to NIIT. Income from a qualifying nonpassive trade or business may receive different treatment. Material participation, the nature of the activity, and other tax rules can affect the result.

Landlords should not assume that every dollar of rental income is automatically subject to the 3.8% tax.

4. Certain passive business income

Income from certain businesses in which the taxpayer does not materially participate may be subject to NIIT. Income from a trade or business involving trading financial instruments or commodities may also be included under applicable rules.

Business owners should review how their income is classified rather than assuming that all business income is treated alike.

5. Certain annuities and other investment income

Nonqualified annuity income and certain other investment-related income may be included. Digital asset transactions may also produce income subject to NIIT, depending on the transaction and the applicable rules.

What Income Is Generally Excluded?

Several types of income are generally not included in net investment income, even though they may count when determining overall income.

Common examples include:

• Wages and salaries.
• Unemployment compensation.
• Social Security benefits.
• Most self-employment income that is subject to self-employment tax.
• Tax-exempt interest.
• Certain qualified retirement plan distributions.

There are exceptions and special rules, so taxpayers should not assume that every item on this list is excluded in every circumstance.

For example, wages are generally excluded from net investment income, but wages can raise a taxpayer’s modified adjusted gross income above the threshold, potentially making other investment income subject to NIIT.

How Do You Complete IRS Form 8960?

Completing Form 8960 involves identifying qualifying income, accounting for applicable expenses and adjustments, and calculating the tax.

Step 1: Gather your tax documents

Collect relevant Forms 1099-INT, 1099-DIV, 1099-B, rental property records, royalty statements, partnership or S corporation Schedule K-1 forms, and other investment-related documents.

You may also need records showing the cost basis and sale proceeds for investments you sold.

Step 2: Determine your net investment income

Review each income source to determine whether it qualifies as net investment income. Include applicable gains and income from relevant passive activities, while accounting for eligible deductions and adjustments under the Form 8960 instructions.

Do not simply add every income item from your tax return together. The NIIT has its own definitions and calculation rules.

Step 3: Calculate modified adjusted gross income

Modified adjusted gross income, or MAGI, for NIIT purposes generally begins with adjusted gross income and includes certain additional adjustments.

For many taxpayers, MAGI may be close to adjusted gross income, but specific circumstances—such as certain foreign earned income exclusions or specialized foreign investment holdings—can require additional calculations.

Step 4: Compare your MAGI with the applicable threshold

Use the threshold for your filing status. Calculate how much, if any, your MAGI exceeds that amount.

Remember that crossing the threshold does not mean all your income is subject to the 3.8% tax.

Step 5: Calculate and report the tax

The form compares the applicable excess MAGI with net investment income and calculates the tax under the relevant rules. For individual taxpayers, the resulting NIIT is generally carried to Schedule 2 of Form 1040.

Estates and trusts have different calculations, including rules based on undistributed net investment income and the applicable trust or estate income threshold.

Use the official instructions for the tax year being filed.

Common Form 8960 Mistakes to Avoid

Taxpayers may make errors when they:

• Assume every person with investment income owes NIIT.
• Apply the 3.8% tax to all income instead of the applicable smaller amount.
• Forget to include taxable dividends, interest, or capital gains.
• Automatically classify all rental income as investment income.
• Overlook eligible deductions or adjustments.
• Confuse NIIT with the Additional Medicare Tax reported on Form 8959.
• Fail to consider the effect of investment income on estimated tax payments.

A careful review of income sources can help prevent mistakes and reduce the risk of an incorrect tax calculation.

Form 8960 vs. Form 8959: What Is the Difference?

Although both forms involve additional taxes, they apply to different types of income.

Form 8960 calculates the 3.8% Net Investment Income Tax on qualifying investment income when the applicable income conditions are met.

Form 8959 calculates the 0.9% Additional Medicare Tax on certain wages, railroad retirement compensation, and self-employment income above applicable thresholds.

A taxpayer may owe one of these taxes, both, or neither. The correct form depends on the taxpayer’s income and circumstances.

How AIM Financial Can Help With Form 8960

The Net Investment Income Tax can become complicated when you have several income sources, rental properties, investment sales, partnership income, or other financial activities.

AIM Financial helps individuals, families, landlords, and business owners in Grand Rapids, Kentwood, Wyoming, and throughout West Michigan understand IRS tax forms and prepare federal income tax returns.

We can help review investment documents, identify potential reporting requirements, and determine whether Form 8960 may be necessary for your return.

If you sold investments, receive substantial dividends or interest, own rental property, or have questions about the additional 3.8% tax, contact AIM Financial for tax preparation assistance.

Final Thoughts

IRS Form 8960 helps taxpayers calculate the Net Investment Income Tax, but owing the tax depends on more than simply earning investment income. Your filing status, modified adjusted gross income, type of income, and applicable deductions all play a role.

Understanding these rules can help you prepare a more accurate tax return and avoid overlooking an additional tax liability.

For assistance with Form 8960, investment income reporting, and tax preparation in Grand Rapids, Kentwood, Wyoming, and West Michigan, contact AIM Financial.

This article is for general educational purposes and is not individualized tax advice. Tax treatment depends on the taxpayer’s facts and the applicable tax year. Review the official IRS Form 8960 and instructions before filing.