Form 8960 Net Investment Income Tax - Individuals, Estates, and Tr

Version A, Cycle 8

Form

8960

Net Investment Income Tax—
Individuals, Estates, and Trusts

Department of the Treasury
Internal Revenue Service (99)

▶ Information

OMB No. XXXX-XXXX

▶ Attach to Form 1040 or Form 1041.
about Form 8960 and its separate instructions is at www.irs.gov/form8960.

Name(s) shown on Form 1040 or Form 1041

Part I

Investment Income

Section 6013(g) election (see instructions)

Regulations section 1.1411-10(g) election (see
instructions)
1
. . . . . .
. . . . . .
2
. . . . . .
3

1
2
3
4a

Taxable interest (Form 1040, line 8a; or Form 1041, line 1) . . . . . . .
Ordinary dividends (Form 1040, line 9a; or Form 1041, line 2a) . . . . .
Annuities from nonqualified plans (see instructions) . . . . . . . . .
Rental real estate, royalties, partnerships, S corporations, trusts,
etc. (Form 1040, line 17; or Form 1041, line 5) . . . . . . .
4a
b Adjustment for net income or loss derived in the ordinary course of
a non-section 1411 trade or business (see instructions) . . . .
4b
c Combine lines 4a and 4b . . . . . . . . . . . . . . . . . . . . . . .
5a Net gain or loss from disposition of property from Form 1040,
5a
combine lines 13 and 14; or from Form 1041, combine lines 4 and 7
b Net gain or loss from disposition of property that is not subject to
net investment income tax (see instructions) . . . . . . .
5b
c Adjustment from disposition of partnership interest or S corporation
stock (see instructions) . . . . . . . . . . . . . .
5c
d Combine lines 5a through 5c. If zero or less, enter -0- . . . . . . . . . . . . .
6
Traders in financial instruments or commodities add back net gain or loss (see instructions)
7
Other modifications to investment income (see instructions) . . . . . . . . . . .
8
Total investment income. Add lines 1, 2, 3, 4c, 5d, 6, and 7 . . . . . . . . . . .

Part II
9a
b
c
d
10
11
12

.

4c

.

.
.

5d
6
7
8

.
.
.

9d
10
11

Internal Use Only
DRAFT AS OF
April 22, 2013

Investment Expenses Allocable to Investment Income and Modifications

Investment interest expenses (see instructions) . . .
State income tax (see instructions) . . . . . . .
Miscellaneous investment expenses (see instructions) .
Add lines 9a, 9b, and 9c . . . . . . . . . . .
Additional modifications (see instructions) . . . . .
Total deductions and modifications. Add lines 9d and 10

Part III

2013

Attachment
Sequence No. 72
Your social security number or EIN

.
.
.
.
.
.

.
.
.
.
.
.

.
.
.
.
.
.

.
.
.

9a
9b
9c
. .
. .
. .

.
.
.

.
.
.

.
.
.

.
.
.

.
.
.

.
.
.

Tax Computation

Net investment income. Subtract Part II, line 11 from Part I, line 8. Individuals complete lines 13–
17. Estates and trusts complete lines 18a–21. If zero or less, enter -0- . . . . . . . . .

12

Individuals:
13
14
15
16
17

Modified adjusted gross income (see instructions) . .
Threshold based on filing status (see instructions) . .
Subtract line 14 from line 13. If zero or less, enter -0- .
Enter the smaller of line 12 or line 15 . . . . . . .
Net investment income tax for individuals. Multiply line
Form 1040, line 60 . . . . . . . . . . . . .

.
.
.
.
16
.

.
.
.
.
by
.

.
13
.
14
.
15
. . . . . . . . . . .
3.8% (.038). Enter here and on
. . . . . . . . . . .

16
17

Estates and Trusts:
18a Net investment income (line 12 above) . . . . . . . . .
18a
b Deductions for distributions of net investment income and
deductions under section 642(c) (see instructions) . . . . .
18b
c Undistributed net investment income. Subtract line 18b from 18a (see
instructions) . . . . . . . . . . . . . . . . . .
18c
19a Adjusted gross income (see instructions) . . . . . . . .
19a
b Highest tax bracket for estates and trusts for the year (see
19b
instructions) . . . . . . . . . . . . . . . . . .
c Subtract line 19b from line 19a. If zero or less, enter -0- . . .
19c
20
Enter the smaller of line 18c or line 19c . . . . . . . . . . . . . . . . . . .
21
Net investment income tax for estates and trusts. Multiply line 20 by 3.8% (.038). Enter here and
on Form 1041, Schedule G, line 4 . . . . . . . . . . . . . . . . . . . . .
For Paperwork Reduction Act Notice, see your tax return instructions.

Cat. No. 59474M

20
21
Form 8960 (2013)

AH XSL/XML

Userid: CPM
Schema: instrx Leadpct: 100%
Fileid: … ions/I8960/2013/A/XML/Cycle01/source

Pt. size: 9

Page 1 of 7

Draft
Ok to Print
(Init. & Date) _______

6:26 - 24-Apr-2013

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

2013

Instructions for Form 8960

Department of the Treasury
Internal Revenue Service

Net Investment Income Tax—
Individuals, Estates, and Trusts
Section references are to the Internal Revenue
Code unless otherwise noted.

General Instructions
What's New
Future developments. For the latest
information about developments related to
Form 8960 and its instructions, such as
legislation enacted after they were
published, go to www.irs.gov/form8960.

Who Must File

income tax return pursuant to an election
under section 6013(g), you can also elect
to be treated as making a section 6013(g)
election for purpose of determining your
NIIT. For purposes of calculating your
NIIT, the effect of such election is to
include your income combined with the
income of your nonresident alien spouse
in determining your net investment income
and your modified adjusted gross income.
If such an election is made, the applicable
threshold amount would be that applicable
to married filing a joint return ($250,000).
See Instructions for (insert appropriate
reference) for how to make the election.

Specific Trusts

The NIIT does apply to the following
trusts: (1) Electing Small Business Trusts
(ESBTs) [see IRC regulation 1.1411-3(c)
(1)(ii) for the general rules of application
and separate instructions for special
computational rules for ESBTs]; (2)
Pooled Income Funds; (3) Cemetary
Perpetual Care Funds; (4) Qualified
Funeral Trusts; (5) Certain Alaska Native
Settlement Trusts.

Foreign Estates and
Foreign Trusts

For Internal Testing
Purposes Only
DRAFT AS OF
April 24, 2013

Attach Form 8960 to your return if Form
8960, line 16 is greater than 0 (individuals)
or line 20 is greater than 20 is greater than
0 (estates and trusts).

Purpose of Form

Use Form 8960 to figure the amount, in
any, of your Net Investment Income Tax
(NIIT).

Recordkeeping

Individuals. The NIIT applies to
individual taxpayers who have net
investment income and modified adjusted
gross income in excess of the applicable
threshold amount. The NIIT is 3.8 percent
of the lesser of your (A) net investment
income for the taxable year, or (B) the
excess, if any, of your modified adjusted
gross income for the taxable year over the
applicable threshold amount.
The applicable threshold amount is
based on your filing status:
Married Filing Jointly or Qualifying
Widower with Dependent Child is
$250,000
Married Filing Separately is $125,000
Single or Head of Household is
$200,000
The NIIT does not apply to a
nonresidential alien. If you are a U.S.
citizen married to an nonresident alien,
your filing status will be married filing
separately for purposes of determining
your threshold amount. In accordance with
the rules for married taxpayers filing
separate returns, the U.S. citizen or
resident spouse must determine his or her
own net investment income and modified
adjusted gross income.

Estates and Trusts

The NIIT applies to estates and trusts that
have undistributed Net Investment Income
and adjusted gross income in excess of
the threshold amount. The NIIT is the
lesser of (A) the undistributed net
investment income for such taxable year,
or (B) the excess, if any, of your adjusted
gross income (as defined in section 67(e))
over the applicable threshold amount.
The applicable threshold amount is the
dollar amount at which the highest tax
bracket in section 1(e) begins for the
taxable year. See Form 1041 instructions
for the highest tax bracket.

Exception for Certain
Domestic Trusts

(1) A trust all of the unexpired interests in
which are devoted to one or more of the
purposes described in section 170(c)(2)
(B); (2) A trust exempt from tax under
section 501, and any other trust, fund, or
account that is statutorily exempt from
taxes imposed in subtitle A; (3) A trust, or
a portion thereof, that is treated as a
grantor trust under subpart E of part I of
subchapter J of chapter 1; (4) A charitable
remainder trust as described in section
664 - See Form 5227 for additional
information. See IRC regulation section
1.1411-3(b) for a complete explanation of
exceptions for certain trusts; (5) Business
Trusts described in 301.7701-4(b) are
excluded; (6) The general rule excludes
certain state law trusts (for example
common trust funds and designated
settlement funds); (7) Charitable
Remainder Trusts

Election to file jointly with nonresident
spouse. If you and your nonresident alien
spouse elected to file a joint Federal
Apr 24, 2013

Cat. No. 53783S

In general, the NIIT does not apply to
foreign estates and foreign trusts that
have little or no connection to the United
States [for example, if none of the
beneficiaries is a United States person].
However, the net investment income of a
foreign estate or foreign trust should be
subject to the NIIT to the extent that such
income is earned or accumulated for the
benefit of, or distributed to, United States
persons.

Bankruptcy Estates of an
Individual

A bankruptcy estate of an individual
debtor(s) is treated as an individual for
purposes of the NIIT. As such, regardless
of the actual marital status of the
debtor(s), the applicable threshold for
purposes of determining the NIIT is the
amount applicable for a married person
filing separately.

Passive Activity
General Rules

Net Investment Income generally includes
income and gain from passive activities. A
passive activity for purposes of Net
Investment Income has the same meaning
as under section 459. A passive activity
includes any trade or business in which
you do not materially participate. A
passive activity also includes any rental
activity, regardless of whether the
taxpayer materially participates (there are
limited exceptions for rentals see
discussion below).
For more details on passive activities,
see the Instructions for Form 8582 and
Publication 925.

Page 2 of 7

Fileid: … ions/I8960/2013/A/XML/Cycle01/source

6:26 - 24-Apr-2013

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Trade or Business Activities

The definition of trade or business for Net
Investment Income purposes is limited to
a trade or business within the meaning of
section 162. This is more restrictive than
the definition of a trade or business for
passive activity purposes. For example,
for passive activity purposes, a trade or
business includes any activity conducted
in anticipation of the commencement of a
trade or business and any activity
involving research or experimentation. In
some cases, income from activities that
are not passive activities under section
469 will be included in Net Investment
Income because the activity does not rise
to the level of a trade or business within
the meaning of section 162. The activity
must be a trade or business within the
meaning of section 162 and be
non-passive before the income is
excluded from the Net Investment Income
Tax.

6. The activity is a personal service
activity in which you materially participated
for any 3 (whether or not consecutive)
preceding tax years. An activity is a
personal service activity if it involves the
performance of personal services in the
fields of health (including veterinary
services), law, engineering, architecture,
accounting, actuarial science, performing
arts, consulting, or any other trade or
business in which capital is not a material
income-producing factor.
7. Based on all the facts and
circumstances, you participated in the
activity on a regular, continuous, and
substantial basis during the year.
You did not materially participate in the
activity under test (7) if you participated in
the activity for 100 hours or less during the
year. Your participation in managing the
activity does not count in determining
whether you materially participated under
this test if any person other than you
received compensation for managing the
activity, or any individual spent more hours
during the tax year managing the activity
than you did.

If you meet one of the exceptions listed
above, the income will not be from a
passive activity if you materially
participated in the activity for the tax year.
However, your income from the activity is
included in Net Investment Income even if
you meet one of the exceptions and
materially participated in the activity if
within the meaning of section 162.

Real Estate Professionals

If you are a real estate professional for
purposes of section 469, your rental
income, or loss will not be passive if you
materially participated in the rental real
estate activity. For additional information
on real estate professionals, see IRC
469(c)(7) and Publication 925.
However, your rental income is
included in Net Investment Income if the
income is not derived in the ordinary
course of a trade or business. Qualifying
as a real estate professional does not
necessarily mean you are engaged in
a trade or business with respect to the
rental real estate activities. If your rental
real estate activity is not a section 162
trade or business or you do not materially
participate in the rental real estate
activities, the rental income will be
included in Net Investment Income Tax.

For Internal Testing
Purposes Only
DRAFT AS OF
April 24, 2013

If you own an interest in a pass-through
entity, the determination of whether the
activity is engaged in a trade or business
is made at the entity level.

Material Participation

A trade or a business is a passive activity
if you did not materially participate in the
activity during the year. If you are an
individual, you materially participate in
your trade or business activity if you are
involved in the operations of the activity on
a regular, continuous, and substantial
basis. You will be treated as materially
participating in an activity if and only if you
meet one of the following tests.
1. You participate in the activity for
more than 500 hours.
2. Your participation was substantially
all the participation in the activity of all
individuals for the tax year, including the
participation of individuals who did not
own any interest in the activity.
3. You participated in the activity for
more than 100 hours during the tax year,
and you participated at least as much as
any other individual (including individuals
who did not own any interest in the
activity) for the year.
4. The activity is a significant
participation activity, and you participated
in all significant participation activities for
more than 500 hours. A significant
participation activity is any trade or a
business activity in which you participated
for more than 100 hours during the year
and in which you did not materially
participate under any of the material
participation, other than this test.
5. You materially participated in the
activity for any 5 (whether or not
consecutive) of the 10 immediately
preceding tax years.

There are special rules applicable to
limited partners. If you owned an activity
as a limited partner, you generally are
treated as not participating in the activity.
You can be treated as materially
participating in the activity if you met test
1, 5, or 6 under the material participation
tests above.

An estate or trust will be treated as
materially participating in an activity if the
fiduciary of the estate or trust participates
in the activity, in its fiduciary capacity, on a
regular, continuous, and substantial basis.
The seven tests for individuals do not
apply to estates and trusts.

Rental Activities

A rental activity is generally a passive
activity regardless of whether you
materially participate. A rental activity is an
activity where payments are principally for
the use of tangible property (real or
personal) that is used or held for use by
customers. However, your activity
involving the use of tangible property is
not a rental activity under Regulation
section 1.469-1T(e)(3)(ii). If any of the
following apply:
The average period of customer use of
the property is 7 days or less.
The average period of customer use is
30 days or less and you provide significant
personal services with the rental.
You provided extraordinary personal
services in connection with making such
property available for customer use.
You provide the property for use in a
non-rental activity in your capacity as an
owner of an interest in the partnership, S
corporation, or joint venture conducting
that activity.
-2-

Re-characterization of Passive
Income

The regulations under section 469 provide
special rules that treat income from the
following activities as not from a passive
activity:
Significant participation passive
activities
Rental of property if less than 30% of
the unadjusted basis of the property is
subject to Depreciation
Passive equity-financed lending
activities
Rental of property incidental to a
development activity
Rental of property to a non-passive
activity
Acquisition of an interest in a
pass-through entity that licenses
intangible property
The income from these activities may be
included in Net Investment Income if the
income is not derived in the ordinary
course of a trade or business and it
constitutes income from interest,
dividends, annuities, royalties, or rents.
For example, net rental income from
property rented to a non-passive activity
(self-rental) that is not derived in the
ordinary course of a trade or business will
be included in net investment income. For
more information on re-characterization of
passive income, see Temporary
Regulations section 1.469-2T(f),
Regulations section 1.469-2(f), and
Publication 925.
2013 Instructions for Form 8960

Page 3 of 7

Fileid: … ions/I8960/2013/A/XML/Cycle01/source

6:26 - 24-Apr-2013

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Economic Grouping

You can treat one of more trade or
business activities and rental activities as
a single activity if those activities form an
appropriate economic unit for measuring
gain or loss under the passive activity loss
rules. For additional information on
passive activity grouping rules, see
Publication 925.
The passive activity grouping rules
determine the scope of your trade or
business and whether that trade or
business is a passive activity for purposes
of Net Investment Income Tax. The proper
grouping of a rental activity with a trade or
business activity will not convert any gross
income from rents into gross income
derived from a trade or business.
In general, once you make a grouping
decision, you may not regroup those
activities in later taxable years unless the
original grouping was clearly inappropriate
or there has been a material change in
facts and circumstances that make the
original grouping clearly inappropriate.
However, you may regroup your activities
under a regrouping “fresh start” for tax
years that begin in 2013. The election to
regroup your activities under the “fresh
start” must be made in the first year you
are subject to the net investment income
tax. In other words, in the first year in
which you have net investment income
and your modified adjusted gross income
exceeds the statutory threshold amount.
The determination of whether you met the
Net Investment Income Tax applicable
income threshold and have net investment
income is made without regard to the
effect of the regrouping. You may only
regroup activities once under the Net
Investment Income Tax “fresh start” and
any such regrouping will apply to the
taxable year for which the regrouping is
done and all subsequent year.

permits a nonresident alien individual
married to a citizen or resident of the US to
elect for purposes of chapter 1 and
chapter 24 of the Code to be treated as a
resident of the US.
Proposed regulation 1.1411-2(a)(2)(i)
(B) provides that married taxpayers who
file a joint Federal income tax return
pursuant to a section 6013(g) election can
also elect to be treated as making a
section 6013(g) election for purposes of
chapter 2A of the Code by checking the
box for section 6013(g) election.
If you make this election, you will
include both your nonresident spouse and
your net investment income together in
determining the tax and use the threshold
amount for married filing jointly.

Regulation Section 1.1411–
10(g) Election

of previously taxed income with respect to
any CFC or QEF in that taxable year.
Example. If in 2014, a single individual
acquires an interest in a QEF, has a QEF
inclusion of $5,000.00, and has modified
adjusted gross income of $150,000.00,
the individual would not have to make an
election for 2014 because section 1411 is
not applicable. If in 2015, the individual
has modified adjusted gross income in
excess of 200,000, and the individual
would like to take QEF inclusions into
account for purposes of section 1411 in
the same manner and in the same taxable
year as such amounts are taken into
account for chapter 1 purposes, the
individual must make the election for 2015
in the time and manner described in
proposed 1.1411-10(g).

Line 1—Taxable Interest

Enter your total taxable interest income
from Form 1040, line 8a, estate or trust's
total taxable interest income from Form
1041, line 1.

For Internal Testing
Purposes Only
DRAFT AS OF
April 24, 2013

Disclosure Requirements

For tax years beginning after January 24,
2010, you are required to report certain
changes to your groupings that occur
during the tax year to the IRS.
Regroupings under the Net Investment
Income Tax “fresh start” are subject to
these disclosure requirements. See
Revenue Procedure 2010-13 and
Publication 925.

Specific Instructions
Part I—Investment Income
Section 6013(g) Election

In general section 6013(a) provides that
no joint return may be made by married
taxpayers if either spouse is a nonresident
alien at any time during the taxable year.
Section 6013(g), however, generally

2013 Instructions for Form 8960

Proposed regulations 1.1411-10(g) allows
individuals, estates, and trusts to make an
election to include inclusions under
section 951 and 1293 in net investment
income in the same manner and in the
same taxable year as such amounts are
included in income for chapter 1 purposes.
If an individual, estate or trust makes
the election, any section 959(d) or section
1293(c) distributions that are not treated
as dividends for chapter 1 purposes are
not treated as dividends for section 1411
purposes, and thus would not be included
in next investment income for section
1411 purposes.

Making the Elections

An individual, estate or trust that wants to
make the election generally must do so for
the first taxable year beginning after
December 31, 2013, during which (1) the
individual, estate or trust owns and
interest in a CFC or PFIC, and (2) the
individual, estate, or trust is subject to tax
under section 1411 or would be subject to
tax under section 1411 if the election
under proposed regulations 1.1411-10(g)
is made.

The election may be made for a taxable
year that begins before 1/1/2014. Once an
election is made, it applies to all interests
in CFCs and PFICs, including CFCs and
PFICs that subsequently are acquired by
the electing taxpayer. The election cannot
be revoked, except with the
Commissioner’s consent.
Determination whether an individual,
estate or trust is subject to tax under
section 1411 for a taxable year is based
on whether the individual’s modified
adjusted gross, or the estate’s or trust’s
adjusted gross income, exceeds the
applicable threshold regardless of whether
the individual, estate, or trust has an
income inclusion under section 951(a) or
section 1293(a), or receives a distribution
-3-

Excluded is the interest income earned
in the ordinary course of your non-1411
trade or business.
All substitute interest from (Form 1040,
line 21) are reported on line 7 of form
8960. These payments are reported to you
in box 8 of Form 1099-MISC.

Line 2—Ordinary Dividends

Enter your total dividends income from
Form 1040, line 9a, or total ordinary
dividends reported on line 2a of form
1041. Enter the total of ordinary dividends
reported to you on Form 1099MISC,
box 2a (dividends) (2012 form) and the
total of ordinary dividends reported to you
on Form 1065 K-1, box 5a and on form
1120S K-1, box 6a. Alaska Permanent
Fund is excluded from Net Investment
Income per revenue ruling 90-56 All
substitute dividends from (Form 1040,
line 21) are report on line 7of form 8960.
These payments are reported to you in
box 8 of Form 1099-MISC.

Line 3-Nonqualified Annuities,
Endowments, or Life Insurance
Contracts

Enter the taxable amount of all annuities
received from nonqualified plans.
Annuities received from both qualified and
nonqualified plans are reported to the
recipient on Form 1099R. However, only
those annuities received from nonqualified
plans are subject to the NIIT. Examples of
annuities from nonqualified plans include
private annuities and purchased
commercial annuities. Annuities from
nonqualified plans are identified with the
special Distribution Code “D” in Box 7 of
Form 1099-R for “Annuity payments from
nonqualified annuities that may be subject
to tax under section 1411”.

Page 4 of 7

Fileid: … ions/I8960/2013/A/XML/Cycle01/source

6:26 - 24-Apr-2013

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

The following annuities are not
included in calculating your Net
Investment Income.
401- Qualified pension, profit-sharing
and stock bonus plans
403(a) - Qualified annuity plans
purchased by an employer for an
employee
403(b) - Annuities purchased by public
schools or section 501(c)(3) tax-exempt
organizations
408 - Individual Retirement Accounts
408A - Roth IRAs
457(b) - Deferred compensation plans
of a State and local government and
tax-exempt organization.
If Distribution Code D is shown in Box 7 of
Form 1099-R, then include on Line 3 of
Form 8960 the taxable amount reported in
Box 2a of Form 1099-R. However, if the
Payor checks Box 2b indicating the
taxable amount cannot be determined,
you may have to figure the taxable portion
of your distribution. See Publication 939,
General Rule for Pensions and Annuities,
and Publication 575, Pension and Annuity
Income, for details.

activity and rises to the level of a Section
162 trade or business.
Net income that has been
re-characterized as not from a passive
activity under the passive loss rules and is
derived in the ordinary course of a Section
162 trade or business.
Net income from property rented to a
non-passive activity (Self-rental that is a
Section 162 trade or business AND has
been re-characterized as not from a
passive activity under the passive loss
rules).
Net income from the rental of property
with less than 30% of the unadjusted basis
subject to depreciation (Land) that is a
Section 162 trade or business AND has
been re-characterized as not from a
passive activity under the passive loss
rules.
Royalties derived in the ordinary course
of a section 162 trade or business that is
not a passive activity.

Line 4a—Rental Real Estate,
Royalties, Partnerships, S
Corporations, Trusts, etc.

Combine Form 1040, lines 13 and 14; or
combine Form 1041, lines 4 and 7.

financial instruments or commodities is
subject to the 3.8% tax. Rules for the
disposition of interests in partnerships and
S corporations maybe adjusted per
proposed Regulations Section 1.1411-7.
In the case of an individual who is directly
engaged in the conduct of a trade or
business the determination of whether net
gain from the disposition is attributable to
property "held" in a trade or business is
made at the individual level. Capital losses
in excess of capital gains generally are not
recognized for purposes of Section 1411,
losses allowable under Section 1211(b)(1)
and (2) are permitted to offset gain from
the disposition of assets other than capital
assets that are subject to Section 1411.
Substantially appreciated property.
Section 1.469-2(c)(2)(iii)(A) generally
provides that if an interest in property used
in an activity is substantially appreciated at
the time of disposition any gain from the
disposition shall be treated as not from a
passive activity. The re-characterized gain
may be taken into account under Section
1411(c)(1)(A)(iii) if the gain is attributable
to the disposition of property.

For Internal Testing
Purposes Only
DRAFT AS OF
April 24, 2013

Enter the total amount from Form 1040
Line 17; or Form 1041, Line 5.

Line 4b—Adjustment for Net
Income or Loss Derived in the
Ordinary Course of a
Non-Section 1411 Trade or
Business

Enter the net positive or net negative
amount for the following items included in
Line 4a that are not included in
determining Net Investment Income.
Net income or loss from a Section 162
trade or business that is not a passive
activity.
Net income por loss from a passive
section 162 trade or business activity that
is taken into account in determining selfemployment income.
Net rental income or loss of a Real
Estate Professional where you materially
participated in the rental real estate
activity AND the activity rises to a Section
162 trade or business.
Rents that are not from a passive
activity, but are derived in the ordinary
course of a trade or business.
Net rental income or loss from a rental
that meets an exception under
Regulations 1.469-1T(e)(3)(ii) AND the
activity rises to a Section 162 trade or
business AND you materially participated
in the activity.
Other rental income or loss reported
from a partnership, 1120S, or trust via K-1,
Line 3, where the activity is not a passive

Line 5a—Net Gains on
dispositions of Property From
Form 1040

Line 5b—Net Gain or Loss from
Disposition of Property That is
Not Subject to Net Investment
Income Tax

The foloowing lines included in Line 5a are
exludable from Net Gains on disposition of
property:
Gain from the sale of property held in a
trade or business that is not a passive
activity.
Gain from a distribution in excess of
basis from partnership or S corporation
that is not a passive activity.
Net Gain attributable to the disposition
of property not held in a trade or business.
The general income tax gain and loss
recognition rules in Chapter 1 of the Code
apply for purposes of determining net gain
under Section 1411. The general income
tax rules in Chapter 1 of the Code
generally will determine whether there has
been a disposition of property under
Section 1411. Proposed regulations
1.1411-(4)(1) uses the term net gain,
which contemplates a positive number,
the proposed regulations provide that the
amount of net gain included in net
investment income may not be less than
zero. Section 1411(c)(1)(A)(iii) net
investment income includes net gain
attributable to the disposition of property.
Net gain attributable to the sale,
exchange, or other disposition of property
not used in a trade or business or used in
a trade or business that is a passive
activity or is trading in financial
instruments or commodities. Property held
in a passive activity or used in trading
-4-

Pass-through Entities. If you hold an
interest in a pass-through entity, the
determination of business engaged in a
trade or business is made at the entity
level. A distribution of money in excess of
the adjusted basis of a partner's interest in
the partnership which recognizes gain
under Section 731(a) or a shareholder
who receives a distribution of money in
excess of the adjusted basis of the
shareholder's stock in the corporation
which recognizes gain under Section
1368(b)(2), the gain is treated as gain
form the sale of exchange of such
partnership interest of S Corporation stock
for purposes of Section 1411(c)(1)(A)(iii).

Line 5c—Adjustment From
Disposition of Partnership
Interest or S Corporation Stock
Disposition of interest in a Partnership
and S Corporation. An interest in a
partnership or S Corporation is not
property held for use in a trade or
business. Gain or loss from the sale of a
partnership interest or S Corporation stock
will be subject to Section 1411(c)(1)(A)(iii)
A transferor of an interest in a partnership
or S Corporation in a similar position as if
the partnership or S corporation had
disposed of all the its properties and the
accompanying gain or loss from the
disposition of such properties flowed
through to it owners. 1. may be a
disparities between the transferor's
adjusted basis in the partnership interest
or S Corporation stock and the entity's
adjusted basis in the underlying
properties. 2. The sales price of the
interest may not reflect the proportionate
share of the underlying properties' fair
2013 Instructions for Form 8960

Page 5 of 7

Fileid: … ions/I8960/2013/A/XML/Cycle01/source

6:26 - 24-Apr-2013

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

market value with respect to the interest
sold. In order to achieve parity between an
interest sale and an asset sale, Section
1411(c)(4) must be applied on a
property-by-property basis. This will
require a determination of how the
property was used in order to determine
whether the gain or loss to the transferor
from the hypothetical disposition of such
property would have been gain or loss
subject to Section 1411(c)(1)(A)(iii). This
is applicable if disposed property is not
used in trade or business or is passive or
sale of financial instruments.
Passive activities. 1411(c)(1)(A) and
1411(c)(2)(A) is intended to take into
account only gross income from the net
gain attributable to passive activity
Shareholders of controlled foreign
corporations.

Line 5d

Dealer: Reports income and expenses on
schedule C, but can file a corporate or
partnership return. Dealers do not report
on a schedule D or form 4797. Because
dealers file a Schedule C they are not
subject to Section 1411 because they are
subject to SECA tax already. A taxpayer is
a dealer if, in the ordinary course of a
trade or business, the taxpayer regularly
purchases securities from or sells
securities to customers or regularly offers
to enter into either side of the securities
transactions with customers.: Inclusions
and Deductions that arise because a
taxpayer has elected to mark to market
stock of a passive foreign investment
company under Section 1296 are deemed
to be attributable to the disposition of
property for purposes of Section 1411.
Accordingly, the amounts included in
income under Section 1296(a)(1) and
amounts allowable as a deduction under
Section 1296(a)(2) are taken into account
in computing net gain for purposes of
Section 1411.

with respect to a PFIC, you will take into
account for net investment income
purposes any amounts included in income
under section 1296(a)(1) and any
amounts deducted from income under
section 1296(a)(2). In addition, if you are
subject to the section 1291 rules with
respect to a PFIC, then you will include in
net investment income “excess
distributions” that are dividends, as well as
gains that are treated as “excess
distributions.” Your treatment with respect
to a CFC or qualified electing fund (QEF)
will depend on whether you make an
election pursuant to proposed Regulation
section 1.411-10(g). If you make the
election, then you will take into account for
net investment income purposes any
inclusions under sections 951(a) and
1293(a). If you do not make the election,
then you will take into account for net
investment income purposes certain
distributions from the CFC and QEF that
are not subject to tax for chapter 1
purposes. In addition, other special rules
apply, including rules that provide for
alternative basis calculations with respect
to your basis in a CFC or QEF, and your
basis in a partnership or S corporation that
owns an interests in a CFC or QEF. For
additional information, see proposed
regulation section 1.411-10.
If you own an interest in a CFC or a
PFIC (other than certain CFCs and PFICs
held in a trade or business described in
section 1411(c)(2)) you will need to
complete either Worksheet A or
Worksheet B. If you own an interest in a
CFC or QEF and made the election
pursuant to proposed regulation section
1.411-10(g), use Worksheet A to
determine the amount to include on line 7
with respect to your interests in CFCs and
PFICs. If you own an interest in a CFC or
PFIC and did not make the election
pursuant to proposed regulation section
1.411-10(g), use Worksheet B to
determine the amount to include on line 7
with respect to your interests in CFCs and
PFICs. For more information about
determining the amounts to report on
Worksheet A and Worksheet B, see
proposed regulation to section 1.1411-10.
(See the instructions for line 4b and 5b for
additional information regarding the
reporting of amounts derived with respect
to CFCs and PFICs.)

For Internal Testing
Purposes Only
DRAFT AS OF
April 24, 2013

Line 6—Traders in Financial
Instruments or Commodities

Investor: An investor is a person who
purchases and sells securities with the
main purpose of realizing investment
income in the form of interest, dividends,
and gains from appreciation in value over
a relatively long period of time. An investor
is never considered to be engaged in a
Section 162 trade or business of investing.
Gains and Losses will be reported on
schedule D and expenses on Schedule A,
Miscellaneous Expenses. Interest and
Dividends will be included on line 1 and 2
of NIIT form/schedule The management of
one's own investments is not considered a
Section 162 trade or business no matter
how extensive or substantial the
investment might be.
Trader: A trader seeks profit from
short-term market swings and receives
income principally from selling on an
exchange rather than from dividends,
interest, or long-term appreciation.
Traders do not have customers A trader
will be deemed to be in a trade or
business as described in Section 162, if
the taxpayer trading is frequent, regular,
and continuous. Can have a negative on
the reporting of trading transactions A
Trader would report gains and losses on
schedule D unless the 475(f)(1) and/or
475(f)(2) were made timely. If 475(f)
election is made timely the taxpayer
should report all sales of the covered by
the elections on form 4797 and expenses
on schedule C. Not all transactions are
involving financial instruments will
necessarily be covered by the elections,
so an electing TP might actually have to
file a form 4797 and a schedule D, rare but
possible

The taxpayer who is deemed a trader
will file a schedule C for expenses
regardless if the 475(f) election was made.
2013 Instructions for Form 8960

Trading in Financial Instruments or
Commodities, income from such trade or
business retains its character as a it flows
up to the taxpayer. Such income will not
qualify for the ordinary course exception in
Section 1411(c)(1)(A)(i). If a Financial or
Commodities Trader makes the election
under Section 475 all trading is reported
on Schedule 4797. Expense will be
reported on Schedule C Financial Traders
under section 1256 contracts will report on
Form 6781, which is then carried over to
Schedule D.

Line 7—Other Modifications to
Investment Income

Controlled Foreign Corporation (CFC)
and Passive Foreign Investment company (PFIC)
Income with respect to investments in
CFCs and PFICs generally is included in
the calculation of net investment income.
For instance, chapter 1 dividends derived
from a CFC or a PFIC are included on
line 2 of Form 8960, and chapter 1 gains
and losses derived with respect to the
stock of a CFC or a PFIC are taken into
account in calculating net gain from the
disposition of property on line 5d of Form
8960. Moreover, income derived with
respect to CFCs and certain PFICs held in
a trade or business described in section
1411(c)(2) is reported on line 4b of Form
8960.
In addition, certain rules apply if you
own an interest in a CFC or PFIC, which
may vary depending upon which set of
anti-deferral rules apply to your CFC or
PFIC interest, and depending upon
whether you make a certain election
provided in the proposed section 1411
regulations. In general, if you are subject
to the section 1296 mark to market rules
-5-

Charitable Remainder Trust (CRT).
An annuity and/or a unitrust distribution
may be net investment income to the
recipient.
Form 8814 election. Parents electing to
include their child's dividends and capital
gain distribution in their income by filing
Form 8814: If the amount on form 8814
line 4 is 1900 or less subtract 950 from the
line 4 amount and include on this line
(other NII income, currently line 6). If any

Page 6 of 7

6:26 - 24-Apr-2013

Fileid: … ions/I8960/2013/A/XML/Cycle01/source

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

amount on line 4 includes Alaska
Permanent Fund dividends, subtract that
amount as well. If the amount on form
8814 line 4 is greater than 1900, include
the amount on Form 8814 line 12 on this
line (other NII income, currently line 6). If
any amount on line 4 includes Alaska
Permanent Fund dividends, subtract that
amount. If you are a partner in an Electing
Large Partnership and receive a Form
1065 B K-1 and box/line 2 contains a loss,
report this loss here as a negative
modifications.

Line 8—Total Investment
Income

Part II—Investment
Expenses Allocable to
Investment Income and
Modifications

Schedule A of Form 1040. Examples
include state or local income taxes that
were withheld and reported on either Form
1099-MISC or Form 1099-R, state or local
income taxes you paid in the current year
for a prior year, estimated tax payments
you made during the year to a state or
local government, or foreign income taxes
imposed on you from a foreign country or
U.S. possession as long as these taxes
are attributable to net investment income.
You can determine the portion of your
state and local income taxes allocable to
net investment income using any
reasonable method. An allocation based
on the ratio of your net investment income
to the amount of your total gross income is
a reasonable method which is illustrated
below:
Example. A, an unmarried individual
has adjusted gross income in year 1 of
$280,000 which includes wages of
$210,000 and interest income of $70,000.
A's deductions on Schedule A as itemized
deductions includes State income taxes of
$30,000. $7,500 is the amount of state
income tax paid that is attributable to net
investment income. As determined below:
($70,000 ÷ $280,000) × $30,000 = $7,500

attributable to the production of
investment income.

Line 9d
Line 10—Additional
Modifications

Beneficiaries who receive Form 1041
K-1s: If an amount is reported in box/
line 5 - Other portfolio and nonbusiness
income - please check to see if an amount
is also reported in box/line 14, Other
information, Code "I". If an amount is
reported with that code, place that amount
as a negative modification on this line Additional Modifications.

Special rule for traders in financial instruments or commodities. Gains and
losses from selling securities as a trader in
financial instruments or commodities are
not subject to self-employment taxes.
However, interest expense and other
investment expenses for a trader are
deducted by a trader on Schedule C
(Form 1040), Profit or Loss From
Business, if the expenses are from the
trading business. Proposed regulations
1.1411-9(b) provides a special rule for a
trader with interest and other investment
expenses to reduce investment income.
Investment income may be reduced by a
trader's interest and other investment
expenses to the extent the expenses are
not used to reduce the trader's
self-employment income. If the trader only
maintains trade or businesses as a trader
the trader does not have self-employment
income because gains and losses from
selling securities as a trader in financial
instruments or commodities are not
subject to self-employment taxes. So a
trader with only one trade or business can
include all these expenses as a
modification on Line 10. If the trader
maintains another trade or business, the
trader may be able to include some or all
of the interest or other investment
expenses from the trading business
reported on the Schedule C as a
modification on Line 10. To determine
whether a trader can include the interest
and other investment expenses as a
modification on Line 10, the trader will
need to complete Schedule SE (Form
1040), Self- Employment Tax, The trader
should use the worksheet below to
determine whether any of the interest or
investment expenses from the trading
business should be included as a
modification on Line 10.
If Line 3 on the Schedule SE is zero or
a positive amount the expenses can not
be included as a modification on Line 10.
If Line 3 of the Schedule SE is a negative
amount, complete the worksheet to
determine the amount of the expenses
that can be included as a modification on
Line 10.

For Internal Testing
Purposes Only
DRAFT AS OF
April 24, 2013

The investment interest expense you paid
or accrued during the tax year is an
allowable deduction in determining your
net investment income tax for the year.
Investment interest expense is interest
that you paid on money you borrowed for
property held for investment. Your net
investment interest expense is limited to
your net investment income. It does NOT
include any interest you paid which is
allocable to passive income for an activity
in which you did not materially participate,
or to securities that generate tax-exempt
income. Form 4952 is completed to figure
your investment interest expense
deduction, unless all three of the following
conditions apply:
1. Your investment interest expense is
not more than your investment income
from interest and ordinary dividends minus
any qualified dividends.
2. You have no other deductible
investment expenses
3. You have no disallowed investment
interest expense If all three conditions
apply, your investment interest expense is
reported on line 14 of Schedule A of Form
1040.

Line 9a—Investment Interest
Expenses

Enter on Line 9a of the Net Investment
Income Tax Form the investment interest
expense you paid or accrued during the
tax year from either line 14 of Schedule A
or the amount from line 8 of Form 4952.
For further details, refer to the instructions
to Form 4952 or to Publication 550,
Investment Income and Expenses.

Line 9b—State Income Tax

Include on line 9b any state or local
income taxes, or foreign income taxes you
paid which are attributable to net
investment income. This may be all or part
of the amount you reported on line 5a of

Note. The state/local income tax
information sections of Forms 1099-MISC
and 1099-R do not have to be completed
by the employer. These are included for
taxpayer convenience only.

Line 9c—Miscellaneous
Investment Expenses

Investment expenses that you incur which
are directly connected to the production of
investment income are deductible
expenses in determining your net
investment income. These expenses can
include investment fees, custodial fees,
any fees paid to collect interest and
dividends, certain legal and accounting
fees, or clerical help and office rent paid in
order to care for your investments. These
do not include investment interest
expenses which are deductible on
Line 8(a) of this Form. Investment
expenses directly connected to the
production of investment income are
reportable as Miscellaneous Itemized
Deductions on Schedule A (From 1040) ,
Line 23. These expenses are subject to
the 2% of adjusted gross income
limitation. You may also have investment
expenses attributable to flow-through
entities such as partnerships, S
corporations and mutual funds that are not
publicly offered. Partners or shareholders
can deduct their share of passed-through
deductions for investment expenses as
Miscellaneous Itemized Deductions
subject to the 2% limit. Enter on Line 1 of
Worksheet A of this Form, the total
amount of investment expenses from
Line 23 of Schedule A, that were
-6-

2013 Instructions for Form 8960

Page 7 of 7

6:26 - 24-Apr-2013

Fileid: … ions/I8960/2013/A/XML/Cycle01/source

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Note. Although Schedule SE must be
completed to determine the amount of
expenses that may be used as a
modification on Line 10, if Line 3 of the
Schedule SE is a negative amount, do not
file the Schedule SE with your Form 1040.
See the instructions for Schedule SE for
who must file a Schedule SE. Retain the
Schedule SE and the worksheet used to
determine the expenses included as a
modification on Line 10 with your records.
Do not file the worksheet with Form 1040.

Line 14—Threshold Based on
Filing Status

Under no circumstances will a net
operating loss deduction be
CAUTION
taken into account in determining
net investment income in any year.

Line 17—Net Investment
Income

!

Line 11—Total Deductions and
Modifications

Part III—Tax Computation

Filing Status

Threshold Amount

Married Filing Jointly

$250,000

Surviving Spouse

$250,000

Married Filing
Separately

$125,000

Any other (Single or
Head of Household

$200,000

Estates and Trusts
Line 18b—Deductions for
Distributions of Net Investment
Income and Deductions Under
Section 642(c)

between adjusted total income and Form
8960, Line 18a. See Instructions for Form
1041, Schedule B, and regulation section
1.1411-3(e) for more information.
The amount of the deduction for net
investment income distributed to
beneficiaries should equal the sum of net
investment income reported to the
beneficiaries on their respective Form
1041, Schedule K-1’s.
Form 1041, Schedule B, provides
for a calculation of a trust’s
income distribution deduction for
regular tax purposes. Form 1041,
Schedule B, can be used as a worksheet
to calculate the income distribution
deduction for net investment income tax
purposes. On this worksheet, Form 1041,
Schedule B, Line 1, is replaced with the
trust’s net investment income from Form
8960, Line 18a. Form 1041, Schedule B,
Line 2, includes both adjusted tax-exempt
interest and the difference between Form
1041, Schedule B, Line 1, and Form 8960,
Line 18a. See Instructions for Form 1041,
Schedule B and regulation section
1.1411-3(e) for more information.

TIP

For Internal Testing
Purposes Only
DRAFT AS OF
April 24, 2013

Line 12—Net Investment
Income

Subtract line 11 from line 8. If zero or less,
stop here, you do not need to file this form.

Line 13—Modified Adjusted
Gross Income

Modified adjusted gross income is
adjusted gross income increased by the
amount excluded from income as foreign
earned income under section 911(a)(1);
over the amount of any deductions taken
into account in computing adjusted gross
income or exclusions disallowed under
section 911(d)(6) with respect to the
amounts described in paragraph (c)(1)(A)

In addition, shareholders of CFCs and
PFICs who have not made the election
provided under proposed Regulations
section 1.411-10(g) must adjust their
modified adjusted gross income as
provided in proposed Regulations section
1.411-10(e)(1).

Report the amount of net investment
income distributed to beneficiaries of the
estate or trust and the amount of net
investment income allocated to
distributions to charity pursuant to section
642(c). The amount of the deduction for
net investment income distributed to
charities under section 642(c) shall be the
amount of the net investment income
allocated to the charity in accordance with
regulation section 1.642(c)-2(b) and the
allocation and ordering rules under
regulation section 1.662(b)-2.

Form 1041, Schedule A, provides
for a calculation of a trust’s
charitable deduction for regular
tax purposes. Form 1041, Schedule A,
can be used as a worksheet to calculate
the amounts of net investment income
allocable to charitable distributions. For
the worksheet, the Form 1041,
Schedule B, Line 2, includes both
tax-exempt income and the difference

TIP

Worksheet for Traders in Financial Instruments That Maintain More
Than One Trade or Business—Line 10

Line 19a—Adjusted gross
Income

Adjusted gross income (see instructions) An estate or trust’s adjusted gross income
can be found in the instructions to Form
1041, Line 17. An estate or trust’s
adjusted gross income is adjusted upward
or downward, as applicable, by the same
amounts described in the instructions to
Form 8960, Line 13.

Line 19b—Highest Tax bracket
for estates and Trusts

Highest tax bracket for estates and trusts
for the year (see instructions) - See
instructions for Form 1041, Schedule G,
2012 tax rate schedule.

Keep for Your Records

Use this worksheet to determine the amount on line 10.
1 Enter the total amount from Line 3 of your 2012 Schedule SE (Form 1040) Self-Employment
tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2 a If the amount on Line 3 of your 2012 Schedule SE is zero or greater, you cannot use the
expenses from your trade or business to reduce your investment income. Stop here.
b If the amount on Line 3 of your 2012 Schedule SE is a negative amount, enter your
expenses from your trade or business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 b
3 Add Line 1 to Line 2b. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
a If the amount on Line 3 of this worksheet is zero or less, include the trade or business
expenses (Line 2b of the worksheet) on Line 10 of Form 8960.
b If the amount on Line 3 of this worksheet is a positive number, convert the amount from
Line 3 of your Schedule SE (Line 1 of this worksheet) into a positive number and include it
on Line 10 of the Form 8960.
2013 Instructions for Form 8960

-7-