Aderant, with its team of experts serving clients across the world from offices in the North America, Europe, and Asia-Pacific regions, operates as a unit of Roper Technologies, a constituent of the S&P 500®, Fortune 1000® and the Russell 1000® indices. The NIIT was legislated as part of the Health Care and Education Reconciliation Act of 2010. It went into effect on January 1, 2013. Along with the ACA, this Act reformed the health care market by requiring individuals to obtainhealth insuranceor pay a tax penalty. NIIT is an additional US income tax applied to whichever is smaller of your net investment income or your Modified Adjusted Gross Income at a rate of 3.8%.
Does investment income affect Social Security benefits?
Wages, bonuses, commissions, and vacation pay count against your Social Security benefits, while investment income, dividends, and interest (among others) are excluded.
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Net Investment Income Tax (3.8% Medicare Surtax)
On line 16, you’re going to enter the smaller of line 12 or line 15. So now, we have a number on line 12, which is coming from line 8 minus line 11 and we have our threshold amount, and we’re going to have to decide what do we include in there. Information is provided ‘as is’ and solely for education, not for trading purposes or professional advice. Note that the NIIT cannot be offset by the foreign tax credit.
In August, the IRS released a draft of Form 8960, Net Investment Income Tax Individuals, Estates, and Trusts, upon which the calculation of this tax is reported. Finally, last week, the IRS issued a draft of the instructions to go with the form. Now for purposes of line 9B, sales taxes are not deductible in computing net investment income. We’re talking about state income taxes. Now state income taxes are subject to the 3% PEASE limitation, but they are not subject to the 2% floor on miscellaneous itemized deductions. The NIIT is applied to the lesser of net investment income or modified adjusted gross income minus the income threshold. Modified adjusted gross income under NIIT includes any foreign income that was excluded under the foreign income exclusion rule, less any deductions that were disallowed under the rule.
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And then on slides 38, we go into more detail on 67 and 68 limitations. If there is enough demand for it, we will evaluate — the AICPA will evaluate whether we can put together another podcast just dealing specifically with the international aspects of the net investment income tax. Generally, the income tax rules in IOC chapter one continue to work. One of the tenets of these regulations has been a great deal of parallelism between the existing tax law under chapter one we’ve worked with for years and the new tax law under chapter two that’s brand new to us. Line 3, we have annuities, annuities from non-qualified plans, and you’re going to enter the taxable amount.
What you need to know about the new IRS Form 8960, Net Investment Income Tax for Individuals, Estates and Trusts: http://t.co/4xYArbbtN8
— American Institute of CPAs (@AICPA) January 30, 2014
Thus, taxpayers meeting the applicable income threshold should consider whether to make use of the one-time regrouping election. This provision is likely to be of particular concern to those taxpayers involved in the rental of real property and interested in avoiding the passive activity taint generally applicable to rental activities. File IRS Form 8960 with your tax return if you’re subject to the net investment income tax. The form comes complete with instructions to help you determine what you owe, and it should be used by both individuals and estates and trusts. Keep in mind that if you owe this tax, the IRS expects you to make quarterly estimated payments on the amount you think you’ll owe. The NIIT is imposed onestates and trustsas well as individuals. For individuals, it applies to U.S. citizens and resident aliens.
Calculate Your MAGI
Assume the surtax applies to the NIIT. $5,000 of the expenses attributable to the investments or miscellaneous expenses.
We include on line 16 the smaller of line 12, our net investment income, or line 15, the amount our MAGI exceeds the threshold. Now if line 15 was zero or less, we put nothing on line 16. It’s that straightforward, so it’s actually very easy. Now on line 15, we want to — what we’re going to do is we’re going to just do the math. If it’s 0 or less you’re going to enter 0.
Calculating Net Investment Income Tax
If you don’t have foreign income or deductions, your AGI and MAGI may be the same. MAGI is different from Adjusted Gross Income for many expats.
- Additional adjustments to your AGI may be needed if you own, directly or indirectly, stock in a Controlled Foreign Corporation or Passive Foreign Investment Company.
- It can include income produced by rental properties, capital gain distributions from mutual funds, and even royalty or annuity income and interest on loans you might have extended to others.
- In such cases the taxpayer must adjust his or her net gain amount in the year of disposition, even if the disposition occurred before 2013.
- Conditions and exceptions apply – see your Cardholder Agreement for details about reporting lost or stolen cards and liability for unauthorized transactions.
- Now if line 15 was zero or less, we put nothing on line 16.
This surtax was effective for tax years beginning after December 31, 2012. Now — so you’re going to enter those. Typically, those are going to be positive numbers when we put that together.
Need Help With Tax Form 8960?
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I’m not going to pay that until April 15. What if in year one, 2013, you had $20 million worth of income from the sale of your business, of which you paid $1.8 of California tax and in year two your income was $300,000. Now you’re trying to deduct that $1.3 of California tax. So you want to make sure you’re matching those up very, very carefully. Now remember interest expense is not subject to those things, but items like state taxes would be. So we have to be very cognizant of that. Okay, now let’s jump to the next slide please.
Gains realized from the sale of a principal residence are spared when the gain is excluded from income for income tax purposes. Beginning in 2013, individuals, estates, and trusts may be subject to the net investment income tax . NIIT is a 3.8% tax on the lesser of net investment income or the excess of modified adjusted gross income About Form 8960, Net Investment Income Tax Individuals, Estates, And Trusts over the threshold amount. For purposes of the net investment income tax, MAGI is generally equal to your adjusted gross income . However, if you are a U.S. citizen or resident living abroad, you must include in MAGI the foreign earned income that is generally excludable from gross income for federal income tax purposes.
- Starting this year, Sec. 1411 imposes a tax equal to 3.8% of the lesser of an individual’s net investment income for the tax year or the excess of the individual’s modified adjusted gross income for the tax year over a threshold amount.
- We’ll use line 7 to report additional net investment income modifications to net investment income that are not otherwise specified in lines 1 through 6.
- Trusts not classified as such for federal income tax purposes, such as real estate investment trusts and common trust funds.
- Remember, the 3.8% Net Investment Income Tax applies on the lesser of the taxpayer’s net investment income or the amount that exceeds the taxpayer’s modified adjusted gross income .
- The instructions address the impact of losses previously disallowed because they were from a passive activity that is no longer passive with respect to the taxpayer.
Thus, the standard deduction or the itemized deduction do not play a role in calculating your modified adjusted gross income. When you hear people talk about “the line,” they are referring to your adjusted https://turbo-tax.org/ gross income . Above the line deduction can lower your adjusted gross income and below the line, such as the standard deduction or the itemized deduction, cannot lower your adjusted gross income.
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