Form 8960: net investment income tax for individuals, estates and trusts
Form 8960 is the IRS form individuals, estates and trusts use to figure the 3.8% net investment income tax. Individuals pay it on the smaller of net investment income or modified AGI above $200,000 ($250,000 joint, $125,000 married filing separately).
“Individuals who have for the tax year (a) MAGI that’s over an applicable threshold amount, and (b) NII, must pay 3.8% of the smaller of (a) or (b) as their NIIT.” IRS, Instructions for Form 8960 (2025)
Who has to file Form 8960?
Form 8960 is attached to the return of any individual, estate or trust whose modified adjusted gross income (MAGI) is greater than the applicable threshold, according to the Instructions for Form 8960 (2025). Individuals owe the net investment income tax (NIIT) at 3.8% of the smaller of net investment income (NII) or MAGI over the threshold. The thresholds are set by filing status, and the IRS notes they aren't indexed for inflation:
- Married filing jointly or qualifying surviving spouse: $250,000
- Married filing separately: $125,000
- Single or head of household: $200,000
For most clients MAGI is simply AGI. It differs only for taxpayers excluding foreign earned income under section 911 or holding certain CFCs or PFICs. Estates and trusts pay 3.8% of the smaller of undistributed NII or AGI over the dollar amount where the top section 1(e) bracket begins, which the 2025 instructions give as $15,650. Nonresident aliens aren't subject to the NIIT, and grantor trusts, charitable remainder trusts and tax-exempt trusts are excluded. The tax goes on Schedule 2 (Form 1040) line 12.
What counts as net investment income on Form 8960?
Net investment income on Form 8960 is gross income from interest, dividends, annuities, royalties and rents, plus income from a passive activity or a trading business, plus net gain from disposing of property, minus deductions properly allocable to that income. Interest, dividends, rents and royalties earned in the ordinary course of a nonpassive trade or business stay out, per the instructions' definition, which follows Treas. Reg. 1.1411-1 through 1.1411-10. The instructions list items that are excluded income:
- Wages and unemployment compensation
- Social security benefits and alimony
- Tax-exempt interest
- Distributions from qualified retirement plans and IRAs
- Income subject to self-employment tax
- Alaska Permanent Fund dividends
Passive status follows section 469. A K-1 from a business the client doesn't materially participate in is NII; the same K-1 from a business they work in full time usually isn't. Gain on selling a partnership interest or S corporation stock is adjusted on line 5c so that only the share tied to passive or investment assets counts.
Where does each source document go on Form 8960?
Form 8960 lines 1 to 5a start from amounts already on the return, so each source document reaches Form 8960 through a Form 1040 or Schedule 1 line. The instructions then use lines 4b, 5b and 7 to strip out amounts that aren't NII, such as nonpassive K-1 income. Part II subtracts allocable deductions, and the instructions allow any reasonable method to split a deduction such as state income tax between NII and excluded income.
Line 7 is the catch-all for other modifications. It takes out interest earned in the ordinary course of a nonpassive business, self-charged interest from a nonpassive partnership or S corporation, and certain deduction recoveries, so a preparer who sees an unusual Form 1099-INT or K-1 interest item should look there before treating it as NII.
| Source document | Return line | Form 8960 |
|---|---|---|
| Form 1099-INT, taxable interest | 1040 2b | 1 |
| Form 1099-DIV box 1a | 1040 3b | 2 |
| Form 1099-R with code D in box 7 | Box 2a taxable amount | 3 |
| Schedule K-1 rental, partnership and S corporation income | Schedule 1 5 | 4a, nonpassive amounts out on 4b |
| Schedule C business income | Schedule 1 3 | 4a, nonpassive amounts out on 4b |
| Form 1099-B through Form 8949 and Schedule D | 1040 7a | 5a |
| Form 4797 gains | Schedule 1 4 | 5a, trade or business gains out on 5b |
| Investment interest (Schedule A line 9) | Schedule A | 9a |
| State, local and foreign income tax | Schedule A | 9b, allocated share |
Capital gains reach line 5a through Form 8949 and Schedule D, and passive K-1 income usually arrives through Schedule E.
What does a Form 8960 calculation look like?
For example, Jordan is single with 2025 wages of $180,000, taxable interest of $6,000, ordinary dividends of $14,000, a $25,000 passive rental K-1 reported on Schedule E, and a $35,000 net capital gain from Form 1099-B sales. AGI and MAGI are $260,000. Jordan itemizes and deducts $12,000 of state income tax, allocated to NII by the ratio of investment income to AGI ($80,000 / $260,000), one reasonable method the instructions describe.
| Step | Form 8960 | Amount |
|---|---|---|
| Taxable interest | 1 | $6,000 |
| Ordinary dividends | 2 | $14,000 |
| Passive rental income | 4a, 4c | $25,000 |
| Net capital gain | 5a, 5d | $35,000 |
| Total investment income | 8 | $80,000 |
| State income tax allocated ($12,000 x 30.77%) | 9b, 11 | $3,692 |
| Net investment income | 12 | $76,308 |
| MAGI minus $200,000 threshold | 15 | $60,000 |
| Smaller of line 12 or line 15 | 16 | $60,000 |
| NIIT at 3.8% | 17 | $2,280 |
The MAGI excess, not NII, sets the tax here. Until the excess over $200,000 reaches $76,308, each added dollar of AGI raises the NIIT by 3.8 cents, even when that dollar is wages. A $10,000 bonus would add $380 of NIIT, while a $10,000 cut in investment income would save nothing.
What do reviewers check on Form 8960?
A reviewer checking Form 8960 confirms six items, each tied to the Instructions for Form 8960 (2025). The passive or nonpassive status of each K-1 is the first thing to pull, because line 4b depends on it and the K-1 itself doesn't say. Then trace lines 1, 2, 4a and 5a back to the return lines the instructions name, and look at Part II for deductions that aren't allowed in figuring NII at all.
Two return-level checks round this out. The line 17 amount should appear on Schedule 2 (Form 1040) line 12, and it belongs in Form 2210 line 2 whenever an underpayment penalty is figured, since the NIIT is part of the tax that estimated payments have to cover. Foreign income tax claimed as a credit can't also be deducted on line 9b.
Every line checked against the documents the client sent
Filed reads the client's Forms 1099-INT, 1099-DIV, 1099-B and 1099-R, K-1s and the return, then checks every line of Form 8960 against them. Anything that doesn't tie comes back as a review item with a citation to the source.
Book a demoForm 8960 line 4a includes $48,200 of K-1 (1120-S) box 1 income from Ridgeway Tools, Inc., grouped as nonpassive on Schedule E, but line 4b is blank. Confirm whether the $48,200 should be backed out on line 4b.
Common questions
Are the NIIT thresholds indexed for inflation?
The NIIT thresholds are not indexed for inflation, according to the IRS questions and answers on the net investment income tax. Individuals use the same $250,000 joint, $125,000 married filing separately and $200,000 single or head of household amounts each year. The estate and trust threshold does move, because it tracks the top bracket, which is $15,650 for 2025.
Is S corporation K-1 income subject to the NIIT?
S corporation K-1 income is subject to the NIIT when the business is a passive activity for the shareholder or a trading business. A shareholder who materially participates in a nonpassive business backs that income out on Form 8960 line 4b. Portfolio income passed through on the K-1, such as interest and dividends, is generally still NII.
Does the NIIT apply to income subject to self-employment tax?
The NIIT does not apply to income taken into account in figuring self-employment income subject to tax under section 1401(b), which section 1411(c)(6) excludes. Income that is excepted from net earnings from self-employment under section 1402(a), such as most rents, can still be NII, per the 2025 Instructions for Form 8960.