You must file Form 8960 with the IRS if you have any net investment income. The 3.8% net investment income tax applies to persons with higher earnings and is a relatively new tax included in the Obamacare law. What is form 8960? The tax applies to those with investment income and those whose modified adjusted gross income is higher than the applicable thresholds, which vary by filing status.

Origins of the Tax on Net Investment Income

The Health Care and Education Reconciliation Act of 2010 included a net investment income tax enacted in March of that year. Conversely, the net investment tax became operational on January 1, 2013. 345

The Act includes a tax on unrealized gains from investments to finance government spending. According to the Joint Committee on Taxation, the tax is expected to bring in $36.6 billion in 2021. 6 The net investment income tax is called the "Unearned Income Medicare Contribution."

Details Revealed By the Form 8960

For purposes of the Net Investment Income Tax, the 3.8% is applied to the lesser of your:

• Your entire net investment income, or
• Your modified adjusted gross income exceeds these restrictions.

You can use the majority of Form 8960 to calculate the percentage of your income subject to that tax. The Income Tax is calculated by taking the amount above and multiplying it by 0.038.

What is form 8960 used for? The fact that not all of your investment income is deemed "Net Investment" income for the tax adds a layer of complication. Your 401(k), IRA(s), 403(b), and pension withdrawals, for example, are not included. 1 2

Net investment income also doesn't have death benefits from life insurance, interest on municipal bonds, and any profit you made on selling your house that wasn't subject to capital gains tax.

When To Fill Out Form 8960

One need not be subject to the Net Investment Income Tax just because they have net investment income to report. What is form 8960 for as There is an extra tax if your MAGI is above a specified threshold. This is known as a "threshold" by the Internal Revenue Service, and its quantity varies based on your tax status. The following is an example for the 2022 tax year:

• Your MAGI (as of publication date) must exceed $250,000 if you file a combined return or use the qualifying widow(er) status.
• If married but filing separately, your MAGI must exceed $125,000.
• Single and head-of-household filers can declare MAGI under $200,000.

Your MAGI is a somewhat different version of your AGI, which is included on the first page of your tax return. However, for most taxpayers, the two numbers will be the same.

How To Calculate Your After-Investment Profit

Investing income includes the profits listed in Section 1 of Form 8960. Typical forms of investment income have interest, dividends, rental income, royalties, and stock market gains.

Total investment income reported in Part 1 is reduced by certain tax-deductible investment-related costs reported in Part 2. Brokerage fees, state and local income taxes and the interest you pay on money you borrow to invest are all examples of deductible costs.

How and When To Fill Out Form 8960

If your Modified Adjusted Gross Income exceeds the above threshold numbers, you may need to file Form 8960 to determine your net investment income. It is unnecessary to submit Form 8938 if your net investment income is $0 or less during the tax year.

To determine if you are subject to the NIIT, Form 8960 is used to multiply either your MAGI or your net investment income (whichever is less) by 3.8%. The NIIT obligation is reported on Schedule NIIT of Form 8960, submitted with the tax return.

Taxes—What Can You Do?

When it comes to this specific tax, you, the investor, often have some say over how much of your net investment income is subject to taxation. Stock appreciation, for instance, is not deemed a taxable capital gain until the stock is sold.

Similarly, if you keep dividend payers in your IRA, you won't have to pay tax on them while they grow in your account or when you eventually cash them out.

Remember that you should keep the tax tail from wagging the investing dog, even though it is essential to consider the actual cost of each investment you make.