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The more you earn and the more sources of income you have, the more complex your tax return tends to be. For example, if you earn a significant amount of investment income, you may need to complete Form 8960: Net Investment Income Tax — Individuals, Estates, and Trusts.
Wondering who exactly needs to file this form, how to do it, and why it matters? We’ll answer all of these questions and more below.
Defining NIIT & MAGI: What do these mean?
Before we get into the weeds with Form 8960, let’s set the stage with some foundational concepts.
Two of the key terms you’ll need to understand when completing Form 8960 are:
NIIT refers to a tax the IRS levies on those with high investment incomes. The IRS applies this tax at a rate of 3.8% on either your net investment income or your MAGI, whichever is smaller.
Pro tip:
Depending on where you most recently lived in the US and your tax residency abroad, you may owe additional state, local, and foreign income taxes on your investment income. In complex situations like this, it’s best to consult a tax professional for specific guidance.
It’s easy to confuse MAGI with Adjusted Gross Income (AGI). However, AGI refers to your total worldwide income minus certain exclusions and deductions — for expats, these exclusions often include the Foreign Earned Income Exclusion (FEIE).
MAGI, on the other hand, takes fewer exclusions and deductions into account. To calculate your MAGI, you’ll generally take your AGI and add back some of the previous income excluded or expenses deducted. This includes income previously excluded under the FEIE.
What is Form 8960?
Taxpayers required to file Form 8960 use it to calculate the amount they owe in NIIT. The form itself is short — just one page — but it requires you to have accurate, detailed knowledge of your income sources and amounts.
Who needs to file Form 8960?
Form 8960 becomes mandatory if you meet two qualifications:
1. You have net investment income
Net investment income includes:
- Rental profits
- Royalties
- Interest
- Dividends
- Certain annuities
- Capital gains realized from the sale of assets (e.g. real estate, stocks, bonds, mutual funds)
Note:
Unless you are a "day trader" (an investor by trade), you can't deduct your investment expenses from your investment income.
Keep in mind that not all types of passive income are investment income, however. A few types of income that you won’t factor into your net investment incom include:
- Unemployment income
- Social Security benefits
- Retirement fund distributions
- Alimony & child support
- Inheritances
While these income types are not subject to NIIT in themselves, they do count toward your MAGI calculation. As such, they could push you over the NIIT threshold.
2. Your MAGI exceeds certain thresholds
The MAGI threshold amounts for NIIT vary depending on your filing status:
| Filing Status | Threshold |
| Single or head of household | $200,000 |
| Married filing jointly or qualifying surviving spouse | $250,000 |
| Married filing separately | $125,000 |
Note:
If you have investment income and your MAGI is higher than the above thresholds, you must file Form 8960. If you don’t have investment income, or you do have investment income but your MAGI is below the thresholds, you don’t need to file Form 8960.
Completing Form 8960
Preparing Form 8960 consists of completing three different sections:
- Part I: Investment Income
- Part II: Investment Expenses Allocable to Investment Income and Modifications
- Part III: Tax Computation
Below, we’ll walk you through the different parts of Form 8960 and how to complete them — feel free to reference the IRS’ step-by-step instructions as well.
Part I: Investment Income
After entering your name and Social Security Number (SSN) or Employer Identification Number (EIN), you’ll begin Part I of Form 8960. First, you have the option to make an election:
- Section 6013(g) election: Allows a nonresident alien married to a US citizen or resident to be treated as a resident for the tax year
- Section 6013(h) election: Allows a nonresident alien married to a US citizen or resident who subsequently becomes a resident alien during the tax year to be treated as a tax resident for the whole tax year
- Regulations section 1.1411-10(g) election: Allows taxpayers with income from a Controlled Foreign Corporation (CFC) or Passive Foreign Investment Company (PFIC) to include it in their net investment income, which can be beneficial in certain cases
If you don’t want to make any of these elections, however, you can skip this section.
Next, you’ll enter the amount of income you’ve earned from different investments and make adjustments/modifications as necessary to arrive at your total investment income.
Note:
When completing these forms, make sure to always convert foreign currency to US Dollars (USD) using an IRS approved source.
Part II: Investment Expenses Allocable to Investment Income and Modifications
In Part II, you’ll input your investment expenses and modifications, which will later be used to help you calculate your net investment income.
Part III: Tax Computation
You’ll start Part III by calculating your net investment income.
Remember:
If your net investment income is zero or less, you don’t have to file Form 8960.
Individuals then use lines 13 through 17 to enter their MAGI, indicate which threshold they fall under, and calculate their NIIT by multiplying the smaller of their net investment income or MAGI.
Form 8960 filing & deadlines
When to file Form 8960
As an individual taxpayer, you’ll file Form 8960 along with Form 1040 and the rest of your tax return. While most Americans have a tax deadline of April 15th, US expats get an automatic two-month extension to June 15th.
You can extend this further to October 15th by filing Form 4868. If you need more time, you can extend it even further to December 15th by submitting a letter to the IRS.
That said, the extension only applies to the date you file your tax return — not the date you pay your tax bill. Expats must still pay their estimated taxes by April 15th to avoid interest, and by June 15th to avoid failure to pay penalties.
Note:
If any of these dates falls on a weekend, the deadline will change to the nearest business day afterward.
Penalties for non-compliance: What happens when you don’t file Form 8960?
While there’s no penalty unique to Form 8960, failing to file it, filing it late, or making errors on it can all result in underreporting your tax owed to the IRS.
Standard IRS penalties include:
- Failure to file penalty: 5% per month up to 25%
- Failure to pay penalty: .5% per month up to 25%
- Underpayment of estimated tax penalty: Varies depending on how much you owe, when it was due, and quarterly interest rates
- Accuracy-related penalty: 20%
If the investments you hold are foreign, you’ll need to make sure they are reported accurately on other required forms. Among others, these may include:
- FinCEN Form 114: The Foreign Bank Account Report (FBAR)
- Form 8938: Statement of Specified Foreign Assets
- Form 8621: Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund
- Form 5471: Information Return of U.S. Persons With Respect To Certain Foreign Corporations
Each of these comes with its own set of penalties for noncompliance, some of which are $10,000 or more per instance or greater. Given the high stakes, it’s often best for expats to work with a licensed tax professional specializing in taxes for Americans abroad.
Help with Form 8960 & beyond
Form 8960 is essential filing for those with net investment income and MAGI that surpasses the reporting threshold. While the form isn’t long, it does require detailed and accurate knowledge of all your investments, as well as some calculations.
