Net Investment Income Tax -- Part Two: What doesn’t count as Investment Income and How do I Know if
It is also important to understand which types of income are not considered or included in Net Investment Income. Below is a non-exhaustive list of common types of income that will not be considered Net Investment Income:
operating income from a non passive business,
Social Security Benefits,
Alaska Permanent Fund Dividends (see Rev. Rul. 90-56, 1990-2 CB 102) and
distributions from certain Qualified Plans (those described in sections 401(a), 403(a), 403(b), 408, 408A or 457(b)).
In order to actually calculate your NIIT, individuals, estates, and trusts must use Form 8960. The accompanying instructions provide a detailed guide on how to fill out the Form. The amount owed is actually reported on and paid with Form 1040 – for individuals – and Form 1041 for trusts and estates.
The next important thing to know is how to find your modified adjusted gross income so you are aware if you have passed a threshold for purposes of the NIIT. According the IRS:
For the Net Investment Income Tax, modified adjusted gross income is adjusted gross income (Form 1040, Line 37) increased by the difference between amounts excluded from gross income under section 911(a)(1) and the amount of any deductions (taken into account in computing adjusted gross income) or exclusions disallowed under section 911(d)(6) for amounts described in section 911(a)(1). In the case of taxpayers with income from controlled foreign corporations (CFCs) and passive foreign investment companies (PFICs), they may have additional adjustments to their AGI. See section 1.1411-10(e) of the final regulations.