IRS Form 8960 – In the complex world of U.S. taxation, high-income earners often encounter additional taxes on their investment earnings. One such tax is the Net Investment Income Tax (NIIT), calculated using IRS Form 8960. This form applies to individuals, estates, and trusts that meet specific income thresholds. Whether you’re an investor managing personal finances or handling estate planning, understanding Form 8960 is crucial for compliance and avoiding penalties. In this guide, we’ll break down what Form 8960 entails, who needs to file it, how to calculate the tax, and more—based on the latest IRS guidelines for tax year 2025.
What Is IRS Form 8960 and the Net Investment Income Tax?
IRS Form 8960, titled “Net Investment Income Tax—Individuals, Estates, and Trusts,” is used to compute the 3.8% NIIT on certain investment income. Introduced under the Affordable Care Act in 2013, the NIIT targets unearned income from investments to help fund healthcare initiatives. It applies to the lesser of your net investment income (NII) or the amount by which your modified adjusted gross income (MAGI) exceeds statutory thresholds.
The tax rate remains unchanged at 3.8% for 2025, with no significant updates reported by the IRS as of early 2026. This form must be attached to your primary tax return, such as Form 1040 for individuals or Form 1041 for estates and trusts.
Who Must File Form 8960?
Not everyone with investment income needs to file Form 8960. Filing is required only if your MAGI exceeds the applicable threshold and you have positive NII. Here’s a breakdown by taxpayer type:
Individuals
U.S. citizens and residents must file if their MAGI surpasses:
- $250,000 for married filing jointly or qualifying surviving spouses,
- $125,000 for married filing separately,
- $200,000 for single or head of household filers.
Special rules apply for nonresident aliens (generally exempt), dual-status taxpayers, and those married to nonresidents. For example, bankruptcy estates are treated as married filing separately with a $125,000 threshold.
Estates and Trusts
Domestic estates and trusts file if they have undistributed NII and their adjusted gross income (AGI) exceeds the dollar amount where the highest tax bracket begins under section 1(e)—$14,450 for tax year 2025. Exemptions include tax-exempt trusts, charitable trusts, grantor trusts, and certain others like real estate investment trusts (REITs).
Qualified funeral trusts and electing small business trusts have unique computation rules, often calculated per beneficiary or separately for S and non-S portions.
Threshold Amounts for 2025
The thresholds for individuals remain the same as in prior years:
| Filing Status | Threshold Amount |
|---|---|
| Married Filing Jointly / Qualifying Surviving Spouse | $250,000 |
| Married Filing Separately | $125,000 |
| Single / Head of Household | $200,000 |
For estates and trusts, the 2025 threshold is $14,450, adjusted annually for inflation. These amounts are not prorated for short tax years or dual-status filers.
What Counts as Net Investment Income?
NII includes various types of passive or unearned income, minus allowable deductions. Common examples are:
- Interest and dividends,
- Annuities (non-qualified portions),
- Royalties and rents (unless from an active trade or business),
- Net gains from property dispositions (e.g., capital gains),
- Income from passive activities or trading in financial instruments/commodities.
For 2025, digital assets like cryptocurrencies are also subject to NIIT if they generate qualifying income. Adjustments may apply for controlled foreign corporations (CFCs) or passive foreign investment companies (PFICs).
Exclusions from NII
Certain income is exempt, including:
- Wages and self-employment income,
- Social Security benefits, alimony, and unemployment compensation,
- Tax-exempt interest,
- Distributions from qualified retirement plans,
- Alaska Permanent Fund dividends.
Active participation in a trade or business (e.g., real estate professionals) can reclassify rental income as non-passive, excluding it from NII.
How to Calculate NIIT Using Form 8960?
Calculating NIIT involves several steps on Form 8960:
- Part I: Investment Income – Sum up gross investment income from sources like Schedules B, D, and E.
- Part II: Investment Expenses – Deduct allocable expenses, such as investment interest (line 9a), state/local/foreign income taxes attributable to NII (line 9b), and other modifications. Note: Miscellaneous investment expenses are disallowed post-2017.
- Part III: Tax Computation – For individuals, take 3.8% of the lesser of NII or MAGI excess over threshold. For estates/trusts, use undistributed NII and AGI excess.
MAGI is generally your AGI plus adjustments like foreign earned income exclusions. Use worksheets in the instructions for precise allocations.
Filing and Reporting Form 8960
- Individuals: Report NIIT on Schedule 2 (Form 1040), line 12.
- Estates and Trusts: Report on Form 1041, Schedule G, line 5.
- Due dates: April 15, 2026, for calendar-year filers; extensions apply as usual.
If you’re an expat or have foreign investments, consult IRS regulations for potential elections or adjustments.
Tips for Compliance and Minimizing NIIT
To reduce your NIIT liability:
- Maximize deductions like charitable contributions (for estates/trusts).
- Consider grouping activities to reclassify passive income as active.
- Use tax-advantaged accounts like IRAs to shelter investment income.
- Track state and local taxes allocable to NII carefully.
Always consult a tax professional for personalized advice, especially with complex structures like trusts or international holdings.
Conclusion
IRS Form 8960 plays a vital role in ensuring high earners pay their share on investment income through the NIIT. By staying informed about thresholds, inclusions, and calculations for 2025, you can file accurately and potentially minimize your tax burden. For the official form, download the PDF here: https://www.irs.gov/pub/irs-pdf/f8960.pdf. For detailed instructions, visit the IRS website or refer to Form 8960’s accompanying guidelines.