US expats who receive income from investments may have to pay an additional US tax called Net Investment Income Tax, or NIIT. The amount of the NIIT is calculated on Form 8960.
What is NIIT?
NIIT is an additional US income tax applied to whichever is smaller of your net investment income or your Modified Adjusted Gross Income (MAGI) at a rate of 3.8%.
MAGI is different from Adjusted Gross Income (AGI) for many expats. AGI is your total worldwide income minus a number of exclusions and deductions, including for many expats the Foreign Earned Income Exclusion.
However, any income excluded using the Foreign Earned Income Exclusion must be added back on to the AGI when calculating the MAGI.
Having calculated your MAGI, if it exceeds certain thresholds and you have investment income, you may have to pay NIIT, which you calculate on Form 8960.
When should you file Form 8960?
Form 8960 should only be used by US expats whose MAGI exceeds certain thresholds. For 2020, these thresholds were:
$250,000 if Married Filing Jointly or if you are a Qualifying Widower
$200,000 if you are Single or the Head of Household
$125,000 if you are Married Filing Separately
“A 3.8 percent Net Investment Income Tax (NIIT) applies to individuals, estates, and trusts that have net investment income above applicable threshold amounts.” – the IRS
If your worldwide MAGI does not exceed these thresholds, you won’t need to file Form 8960. If it does on the other hand, you should fill out the form to see if you owe any taxes on your net investment income.
How to calculate your Net Investment Income on Form 8960
The first step is understanding which income types qualify as investment income. These include annuities, rental profits, royalties, interest, and dividends. Form 8960 requires you to enter your income from these sources by income type, and calculate the total.
The second part of the form allows you to subtract deductible expenses from your investment income total. These might include interest, fees, and payments that relate to your investments. Once you have figured out both of these parts, you will have your total Net Investment Income.
If your total net investment income after allowable deductions is zero or below, then you don’t need to file Form 8960 and pay any NIIT at all. If it is greater than zero on the other hand, you will.
When is the deadline for filing Form 8960?
Form 8960 should be filed with your federal tax return. As a US expat, you receive an automatic two month filing extension, so your filing deadline is June 15. This can be extended further to October 15 on request. However, if you do owe any US tax, including NIIT, you must still pay at least an estimated amount by April 15.
What if you didn’t know you had to file from abroad?
US expats who haven’t been filing from abroad because they didn’t know that they had to can catch up without facing penalties, as long as the IRS hasn’t yet contacted them about it, under an amnesty program called the Streamlined Procedure.