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Compute net investment income tax and additional Medicare tax
Two surtaxes apply in addition to regular and employment taxes. One follows investments, the other follows wages. Returns with both kinds of income need each base measured separately.
The net investment income tax, figured on Form 8960, is 3.8% on the smaller of two numbers: (a) modified adjusted gross income over the threshold, and (b) net investment income after properly allocable deductions. NII centers on passive activity income, portfolio income, and gains on investment property. Income already counted toward self-employment tax under section 1401(b) stays out:
\(\text{NIIT} = 3.8\% \times \min(\text{MAGI} - \text{threshold}, \text{NII})\)
The comparison matters whenever one amount is small: a large portfolio beside modest MAGI pays on the MAGI excess, while high MAGI beside small NII pays on NII.
Nadia files single with MAGI of $230,000 and NII of $100,000. Excess MAGI is $30,000. The smaller of $30,000 and $100,000 is $30,000, so NIIT is \(30{,}000 \times 3.8\% = 1{,}140\). If her NII were only $5,000, the smaller would be $5,000 and NIIT would be $190.
Form 8960 Instructions Page 2
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.View on the source
Form 8960 Instructions Page 1
Income taken into account in determining self-employment income subject to tax under section 1401(b) is specifically excluded from NIIT under section 1411(c)(6).View on the source
Form 8960 Instructions Page 1
Use Form 8960 to figure the amount of your Net Investment Income Tax (NIIT).View on the source
Form 8960 Instructions Page 1
Generally, NII includes gross income from interest, dividends, annuities, royalties, and rents, unless they’re derived from the ordinary course of a trade or business that isn’t (a) a passive activity, or (b) a trade or business of trading in financial instruments or commodities.View on the source
Form 8960 Instructions Page 4
NII generally includes income and gain from passive activities.View on the source
Form 8960 Instructions Page 1
Additionally, NII includes net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property other than property held in a trade or business that’s not (a) a passive activity, or (b) a trade or business of trading in financial instruments or commodities.View on the source
Dana, a single filer, has $80,000 in wages, $6,000 in taxable interest, $4,000 in qualified dividends, and a $12,000 distribution from a traditional 401(k). What is her net investment income (NII)?
The threshold on Form 8960 follows filing status. Joint and qualifying surviving spouse use $250,000, married filing separately uses $125,000, and single or head of household uses $200,000. Nonresident aliens are outside the tax entirely. The table below compares the two surtaxes:
| NIIT | Additional Medicare Tax | |
|---|---|---|
| Rate | 3.8% | 0.9% |
| Base | Smaller of MAGI excess and NII | Wages plus SE income above $250,000 joint, $125,000 MFS, or $200,000 single/HoH/QSS |
| Single trigger | MAGI over $200,000 with NII | Wages plus SE income over $200,000 single/HoH/QSS ($250,000 joint; $125,000 MFS) |
Using the joint threshold for a single filer understates the tax; using the single threshold for a joint return overstates it.
Omar and Pia file jointly with MAGI of $300,000 and NII of $40,000. The joint threshold is $250,000, so excess MAGI is $50,000. The smaller of $50,000 and $40,000 is $40,000, so NIIT is \(40{,}000 \times 3.8\% = 1{,}520\). A single filer with the same numbers would face a $200,000 threshold and a $100,000 excess instead.
Form 8960 Instructions Page 2
Single or Head of household is $200,000.View on the source
Form 8960 Instructions Page 2
Married filing jointly or Qualifying surviving spouse is $250,000.View on the source
Form 8960 Instructions Page 2
Married filing separately is $125,000.View on the source
Form 8960 Instructions Page 2
The NIIT doesn’t apply to nonresident alien (NRA) individuals.View on the source
Fiona, filing single, has MAGI of $190,000 and NII of $40,000. What is her net investment income tax?
The Additional Medicare Tax is 0.9% on wages, RRTA compensation, and self-employment income above the filing-status threshold: $250,000 joint, $125,000 married filing separately, and $200,000 single, head of household, or qualifying surviving spouse. Wages and self-employment income combine for the test, and a self-employment loss is left out rather than netted. RRTA compensation should be separately compared to the threshold. Withholding follows a simpler employer rule: once an employer's wages to a worker exceed $200,000 for the year, it withholds, whatever the worker's filing status and whatever other employers paid. The worker reconciles any balance on Form 8959, including the reduction of the SE threshold by Medicare wages received.
Seth files single with $210,000 of Medicare wages and $40,000 of SE income. Combined income is $250,000. Against a $200,000 single threshold the excess is $50,000, so Additional Medicare Tax is \(50{,}000 \times 0.9\% = 450\). His employer withheld on wages above $200,000 ($10,000 of wages); the remaining liability is reconciled on Form 8959.
Form 8959 Instructions Page 1
A 0.9% Additional Medicare Tax applies to your Medicare wages, Railroad Retirement Tax Act (RRTA) compensation, and self-employment income above a threshold amount.View on the source
Form 8959 Instructions Page 1
Medicare wages and self-employment income are combined to determine if your income exceeds the threshold.View on the source
Form 8959 Instructions Page 1
A self-employment loss shouldn’t be considered for purposes of this tax.View on the source
Form 8959 Instructions Page 1
RRTA compensation should be separately compared to the threshold.View on the source
Form 8959 Instructions Page 4
The $130,000 of Kathleen’s wages reduces Liam’s self-employment income threshold to $120,000 ($250,000 threshold minus the $130,000 of wages, as figured on lines 9 through 11 of Form 8959).View on the source
Form 8959 Instructions Page 2
Don is liable for Additional Medicare Tax on $75,000 of wages ($200,000 in wages minus the $125,000 threshold for a married filing separately return).View on the source
Form 8959 Instructions Page 2
Ann isn’t liable for Additional Medicare Tax and doesn’t need to file Form 8959 because her self-employment income is less than the $200,000 threshold for single filers.View on the source
Form 8959 Instructions Page 2
the threshold amount for applying Additional Medicare Tax on the self-employment income is reduced (but not below zero) by the total amount of Medicare wages received.View on the source
Form 8959 Instructions Page 2
Your employer must withhold Additional Medicare Tax on wages it pays to you in excess of $200,000 for the calendar year, regardless of your filing statusView on the source
Nadia, filing single, has $120,000 in Medicare wages and $150,000 in self-employment income. What is her Additional Medicare Tax on the self-employment income?
The course asks you questions like these as you learn, brings back the ones you miss, and ends with full-length practice exams.
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