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Connect on LinkedInA strong year for your investments can come with an extra tax bill. If your income exceeds the relevant threshold—$200,000 for single filers, $250,000 for joint filers or $125,000 for married couples filing separately—and you have investment income, you may owe the 3.8% Net Investment Income Tax.
You use Form 8960 to calculate what—if anything—you owe. And if you live abroad, don’t overlook your foreign investments: interest, dividends, rent and capital gains can all count.
Form 8960 at a glance
| Key detail | What you need to know |
| Purpose | Calculates the 3.8% Net Investment Income Tax |
| Who owes the tax | Individuals, estates, and trusts that meet the income requirements |
| Individual income thresholds | $200,000 for single and head-of-household filers; $250,000 for married couples filing jointly; $125,000 for married couples filing separately |
| Amount subject to tax | The smaller of your net investment income or the amount your MAGI exceeds the threshold |
| How it’s filed | Attached to the relevant federal tax return, such as Form 1040 |
| Filing deadline | The deadline for the accompanying return, including extensions |
Who must file Form 8960?
Form 8960 uses your modified adjusted gross income (MAGI) to determine whether you need to file. MAGI starts with your adjusted gross income (AGI), which appears on Form 1040 and other IRS forms, and adds back certain amounts.
For most taxpayers, AGI and MAGI are the same. One important exception for Americans abroad is foreign earned income excluded from U.S. tax, which is added back when calculating MAGI.
You must file Form 8960 if your MAGI exceeds the threshold for your filing status:
| Filing status | MAGI threshold |
| Single or head of household | $200,000 |
| Married filing jointly or qualifying surviving spouse | $250,000 |
| Married filing separately | $125,000 |
Crossing the threshold doesn’t necessarily mean you owe the tax. You must also have net investment income.
Estates and trusts use a different test. The tax applies when they have undistributed net investment income and their AGI exceeds an annual threshold. They pay 3.8% on whichever amount is lower: the undistributed investment income or the income above the threshold. Some trusts, including grantor trusts and certain charitable trusts, are exempt.
What counts as net investment income?
Net investment income is broader than profits from stocks and funds. It can also include interest, dividends, rent, royalties and income from businesses in which you do not actively participate.
| Usually included | Usually excluded |
| Taxable interest | Wages and salaries |
| Ordinary and qualified dividends | Social Security benefits |
| Capital gains | Tax-exempt interest |
| Rental income and royalties | Qualified retirement-plan distributions |
| Annuity income outside qualified retirement plans | Income subject to self-employment tax |
| Income from a passive trade or business | Income from an active trade or business, unless it involves trading financial instruments or commodities |
These amounts are added together on Form 8960 to calculate your total investment income. Certain adjustments, expenses and losses are then deducted to arrive at your net investment income.
Business income requires a closer look. Whether it counts depends on how involved you are in the business—known as material participation—and whether the business trades financial instruments or commodities.
Wages are excluded from net investment income, but they still count toward MAGI. This means employment income can push you over the threshold and cause your investment income to become subject to the tax.
💡 Pro Tip:
A pay rise or bonus is not subject to the Net Investment Income Tax, but it can push your MAGI above the threshold and expose more of your investment income to the 3.8% tax.
Which expenses can reduce net investment income?
The good news is that the 3.8% tax isn’t calculated on every dollar of investment income you receive. Certain expenses can reduce the amount, as long as they are allowed on your federal tax return and connected to that income.
These may include:
- Investment interest expenses, such as interest on money borrowed to buy investments.
- Rental and royalty expenses, such as eligible property-management and maintenance costs.
- Brokerage and transaction costs, which are usually included when calculating your gain from a sale.
- State and local income taxes connected to your investment income, subject to the usual deduction limits.
For example, if you receive $20,000 in rental income and have $5,000 in allowable rental expenses, Form 8960 starts with the remaining $15,000. Personal expenses and costs related to income excluded from the tax cannot be deducted.
How is the 3.8% tax calculated?
Form 8960 compares two amounts and applies the tax to whichever is lower:
- Add up your net investment income after allowable expenses.
- Subtract your filing threshold from your MAGI.
- Multiply the smaller of those two amounts by 3.8%.
For example, suppose a single filer has MAGI of $230,000 and net investment income of $50,000:
- Their income is $30,000 above the $200,000 threshold.
- $30,000 is lower than their $50,000 of net investment income.
- The 3.8% tax therefore applies to $30,000.
- Their Net Investment Income Tax is $1,140.
💡 Pro Tip:
A capital gain can increase both sides of the calculation: it adds to your net investment income and usually raises your MAGI. Before selling a valuable investment, check whether the gain could push you over the threshold as well as increase the amount subject to tax.
How does Form 8960 affect Americans abroad?
Living abroad does not remove foreign investments from the Form 8960 calculation. If you’re a U.S. citizen or resident, foreign interest, ordinary dividends, rental income, royalties and capital gains can count as net investment income.
A few rules are especially important:
- The Foreign Earned Income Exclusion does not reduce MAGI in the same way it reduces regular taxable income. Income excluded under the FEIE is added back when calculating MAGI for Form 8960, with certain adjustments. The excluded salary itself is not investment income, but it can push you above the income threshold.
- The Foreign Tax Credit cannot reduce the Net Investment Income Tax. If you deduct foreign income taxes instead of claiming the credit, the portion connected to your net investment income may reduce the Form 8960 calculation. If you claim a credit for any foreign income taxes paid that year, you cannot also deduct foreign income taxes on Form 8960.
- CFCs and PFICs have additional rules. Income from a Controlled Foreign Corporation or Passive Foreign Investment Company may be treated differently for regular income tax and the Net Investment Income Tax, so adjustments may be required.
Nonresident aliens are not subject to the Net Investment Income Tax. Dual-status taxpayers are subject to it only during the part of the year they are U.S. residents. People claiming foreign residence under a tax treaty also need to check how that claim affects their U.S. residency for Form 8960.
💡 Pro Tip:
Calculate gains on foreign investments in U.S. dollars, using the appropriate exchange rates for both the purchase and the sale. Converting the gain only after calculating it in local currency can produce the wrong result—and exchange-rate movements can leave you with a U.S. taxable gain even when the investment barely changed in local currency.
How do you complete and file Form 8960?
Most of the figures on Form 8960 come from income and deductions already reported elsewhere on your tax return. The form brings them together in three parts:
| Part | What it does |
| Part I | Adds up your investment income and makes any required adjustments |
| Part II | Subtracts eligible expenses and deductions |
| Part III | Compares your net investment income with your MAGI and calculates the tax |
Individuals attach Form 8960 to Form 1040, Form 1040-SR or Form 1040-NR, as applicable. Estates and trusts attach it to Form 1041. The form has no separate deadline: it is filed with the accompanying return, including extensions.
Keep the documents behind the calculation, including income statements, purchase and sale records, investment basis, expenses, foreign taxes and exchange rates. Some records may be needed for as long as you hold the investment.
💡 Pro Tip:
Form 8960 is filed with your annual return, but you may need to pay the tax during the year. If you expect to owe the Net Investment Income Tax, consider increasing your withholding or estimated tax payments to avoid an underpayment penalty.
Get help with Form 8960
It isn’t always obvious whether the Net Investment Income Tax applies when your income spans more than one country. Foreign earned income can affect the threshold even when it’s excluded from regular U.S. tax, and overseas investments don’t always fit neatly into the Form 8960 calculation.
Bright!Tax can review the full picture, work out what belongs on the form and calculate the tax correctly as part of your U.S. return.
Frequently Asked Questions
Is Form 8960 the same as the Net Investment Income Tax?
No. The Net Investment Income Tax is the additional 3.8% tax itself. Form 8960 is the form used to calculate and report it.
Do I need to file Form 8960 if I don’t owe the tax?
You may. If your MAGI exceeds the threshold for your filing status, you must complete Form 8960. The calculation may still show that no tax is due if you have no net investment income.
Do foreign investments count on Form 8960?
Yes. U.S. citizens and residents can be taxed on investment income from anywhere in the world. Interest, dividends, rent, royalties and capital gains from foreign assets can all count.
Does the Foreign Earned Income Exclusion reduce my MAGI?
Not for Form 8960. Foreign earned income excluded from regular U.S. tax is added back when calculating MAGI, subject to certain adjustments. The excluded salary is not net investment income, but it can push your MAGI above the threshold.
Can the Foreign Tax Credit reduce the Net Investment Income Tax?
No. The Foreign Tax Credit can reduce regular U.S. income tax, but it cannot offset the Net Investment Income Tax. If you deduct foreign income taxes instead of claiming the credit, some of the deduction may reduce net investment income.
Do retirement distributions count as net investment income?
Distributions from qualified retirement plans, including most 401(k)s and IRAs, do not count as net investment income. However, taxable distributions can increase MAGI and cause other investment income to become subject to the 3.8% tax.
Does rental income always count?
No, but it often does. Rental income usually counts when the activity is passive. Different treatment may apply if the rental is part of a nonpassive trade or business and you meet the relevant participation requirements.
Is a gain from selling my home subject to the tax?
Only the taxable portion can count. If you qualify for the home-sale exclusion, the excluded gain is also left out of net investment income. The same principle can apply to a qualifying main home outside the United States.
Are nonresident aliens subject to the Net Investment Income Tax?
No. Nonresident aliens are not subject to the tax. Dual-status taxpayers may be subject to it during the part of the year in which they are treated as U.S. residents.
Is the Net Investment Income Tax the same as the Additional Medicare Tax?
No. The Net Investment Income Tax applies to certain investment income, while the Additional Medicare Tax applies to wages, compensation and self-employment income above its thresholds. A taxpayer can owe both in the same year.
Do estates and trusts use the individual income thresholds?
No. Estates and trusts use an annual threshold based on where the highest federal income tax bracket for estates and trusts begins. They can owe the tax on undistributed net investment income above that threshold.
When is Form 8960 due?
Form 8960 is filed with the related federal tax return and follows the same deadline, including extensions. Individuals attach it to the appropriate individual return, while estates and trusts attach it to Form 1041.
