Bob Keebler goes line by line through Form 8960, Net Investment Income Tax for Individual, Estates and Trusts, to help members understand key elements they need to know for tax season.

1. IRS Form 8960:
Draft Instructions
Issued January 6, 2014, Webinar on January 8, 2014
Presented by:
Robert S. Keebler, CPA, MST, AEP
Keebler & Associates LLP
To print draft Form 8960 go to:
http://www.irs.gov/pub/irs-dft/f8960--dft.pdf
© 2013 Prepared by Keebler & Associates, LLP
All Rights Reserved

2. Introduction
About the PFP Section & PFS Credential
• The AICPA PFP Section provides information,
resources, advocacy and guidance for CPAs who
specialize in providing estate, tax, retirement, risk
management and investment planning advice to
individuals and their closely held entities (learn more
at aicpa.org/PFP)
• The CPA/Personal Financial Specialist (PFS)
credential distinguishes CPAs as subject-matter
experts who have demonstrated their financial
planning knowledge through experience, education
and testing (learn more at aicpa.org/PFS)
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Personal Financial Planning Section
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3. Introduction
Robert S. Keebler, CPA, MST, AEP
Robert.Keebler@KeeblerandAssociates.com
920-593-1700
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4. Form 8960 – Part 1
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5. Line 1
Taxable Interest
• Form 1040; Line 8A; or Form 1041; Line 1
Interest income earned in the ordinary course of
your non-section 1411 trade or business is excluded
from net investment income.
If line 1 includes self-charged interest income
received from a partnership or S corporation that is
a nonpassive activity see the Line 7 instructions for
a possible adjustment to net investment income.
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6. Line 2
Ordinary Dividends
• Form 1040; Line 9A; or Form 1041; Line 2A
Note:
• If line 2 includes dividends from employer securities
held in an employee stock ownership plan (ESOP)
that are deductible under section 404(k) or Alaska
Permanent Fund Dividends, include those amounts
as negative modifications on line 7.
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7. Line 3
Annuities from Non-Qualified Plans
• Enter the gross income from all annuities received from
nonqualified plans.
Distributions from the following annuities/retirement
plans are not included in calculating your net investment
income:
• Section 401- Qualified pension, profit-sharing, and stock bonus
plans;
• Section 403(a) - Qualified annuity plans purchased by an employer
for an employee;
• Section 403(b) - Annuities purchased by public schools or section
501(c)(3) tax-exempt organizations;
• Section 408 - Individual Retirement Accounts;
• Section 408A - Roth IRAs; and
• Section 457(b) – Deferred compensation plans of a State and local
government and tax-exempt organization.
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8. Line 4A & Line 4B
Line 4A: Rental Real Estate, Royalties,
partnerships, S Corporations, trusts, etc.
• Form 1040; Line 17; or Form 1041; Line 5
Line 4B:Adjustment for net income or loss
derived in the ordinary course of a nonsection 1411 trade or business.
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9. Line 4B (continued)
Enter the net positive or net negative amount
for the following items included in line 4a
that are not included in determining NII:
• Net income or loss from a section 162 trade or business that is
not a passive activity and is not engaged in a trade or business
of trading financial instruments or commodities,
• Net income or loss from a passive section 162 trade or business
activity that is taken into account in determining self-employment
income,
• Royalties derived in the ordinary course of a section 162 trade
or business that is not a passive activity, and
• Passive losses of a former passive activity that are allowed as a
deduction in the current year by reason of section 469(f)(1)(A).
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10. Line 4B (continued) & Line 4C
Line 4B:
• In addition, use line 4b to adjust for certain types of nonpassive
rental income or loss derived in the ordinary course of a section
162 trade or business.
- See the instructions for examples of what items line 4B
includes; i.e., self-rentals, real estate professional safe
harbor, etc.
Line 4C: Combine lines 4A and 4B.
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11. Line 5A
Net gain or loss from disposition of property
• From form 1040, combine lines 13 and 14; or from form 1041,
combine lines 4 and 7.
Generally, the general income tax rules in IRC
chapter 1 will determine whether there has been a
disposition of property for the NIIT purposes.
Generally, the term disposition means a:
• Sale, Exchange, Transfer, Conversion, Cash settlement,
Cancellation, Termination, Lapse, Expiration, Deemed disposition,
for example under section 877A, or Other disposition.
If you incur gain or loss from a disposition that is
not reported on Form 1040, lines 13 and 14, or Form
1041, lines 4 and 7, report those gains on Form 8960,
line 7.
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12. Line 5B
Net gain or loss from disposition of property
that is not subject to net investment income
tax.
Gains and losses that are not taken into
account in computing taxable income are not
taken into account in computing net
investment income.
• For example, gain that is not taxable by reason of section
121 (sale of a principal residence) or section 1031 (likekind exchanges) is not included in net investment income.
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13. Line 5B (continued)
Use line 5b to adjust the amounts included
on line 5a for gains and losses that are
excluded from the calculation of net
investment income.
Enter the amount of gains (as a negative
number) and losses (as a positive number)
included on line 5a that are excluded from
net investment income.
• See the instructions for examples of amounts that line 5b may
include.
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14. Line 5C & Line 5D
Line 5C:
• Adjustment from disposition of partnership interest or S
Corporation stock.
• Enter the amount from the worksheet provided for in the
instructions for Lines 5a-5d, Part II, line 3d.
• Attach a statement as described in the Required
statements part of the instructions to your return for the
year of the disposition.
Line 5D:
• Combine lines 5A, 5B, and 5C
See Lines 5a-5d – Net Gains and Losses
Worksheet in the instructions.
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15. Line 6
Changes to investment income for certain
CFCs and PFICs
If you own stock, directly or indirectly, in a
CFC or a PFIC (other than certain CFCs and
PFICs held in a section 1411 trade or
business), use line 6 for adjustments
necessary to calculate your net investment
income.
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16. Line 7 & Line 8
Line 7:
• Other modifications to investment income.
• Use line 7 to report additional net investment income
modifications to net investment income that are not
otherwise specified in lines 1-6.
• See the instructions or examples of additions and
modification to net investment income that should be
reported in line 7.
• See the instructions for a Line 7 – Deduction Recoveries
Worksheet.
Line 8:
• Total Investment Income
• Combine Lines 1, 2, 3, 4C, 5D, 6, and 7
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17. Form 8960 - Part 2 and 3
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18. Line 9A
Investment Interest Expenses
Enter on Form 8960, line 9a, interest expense
you paid or accrued during the tax year from
either Schedule A (Form 1040), line 14 or the
amount from Form 4952, line 8.
Observation: The Investment Interest Expense deduction allowed by
Section 163 IS NOT subject to EITHER the 2% Floor (Section 67) or 3%
Pease (Section 68) limitations.
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19. 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
Schedule A (Form 1040), line 5a (or Form 1041, line 11).
• For purposes of line 9b, sales taxes are not deductible
in computing net investment income.
Observation: State Income Tax deductions ARE subject to the 3% Pease
(Section 68) limitation but NOT the 2% Floor (Section 67) limitation.
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20. Line 9C & Line 9D
Line 9C:
• Miscellaneous Investment Expenses
• Investment expenses you incur that are directly connected to the
production of investment income are deductible expenses in
determining your net investment income.
- Generally, these amounts are reported on Form 4952, line 5.
- As in the case with line 5 of Form 4952, the amounts reported on
line 9c are the amounts allowable after the application of the
deduction limitations imposed by sections 67 and 68.
Observation: The Miscellaneous Investment Expense deduction allowed IS
subject to the 2% Floor (Section 67) or 3% Pease (Section 68) limitations.
Line 9D:
• Add lines 9A, 9B, and 9C
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21. Line 10
Line 10:
• Additional Modifications
• Use line 10 to report additional deductions and
modifications to net investment income that are not
otherwise reflected in lines 1-9.
- See the instructions for properly allocable deductions to
report on line 10.
• Enter amounts on line 10 as positive numbers.
• See the instructions for Lines 9 and 10 – Application
of Itemized Deduction Limitations on Deductions
Properly Allocable to Investment Income Worksheet.
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22. Line 11 & Line 12
Line 11:
• Total Deductions and Modifications
• Add lines 9D and 10
Line 12:
• Net Investment Income.
- Subtract Part 2, Line 11 from Part 1, Line 8.
- If 0 or less, enter 0.
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23. Individuals & Estates/Trusts
Individuals complete lines 13-17
Estates/trusts complete lines 18A-21
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24. Individuals
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25. Line 13
Modified Adjusted Gross Income
If you did not exclude any amounts from your
gross income under section 911 and you do not
own a CFC or PFIC, your MAGI is your AGI as
reported on Form 1040, line 38.
If you exclude amounts under section 911 or
own certain CFCs or PFICs, your MAGI is your
AGI as modified by certain rules described in
Regulations section 1.1411-10(e)(1).
See Instructions for a Line 13 – MAGI Worksheet
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26. Line 14
The threshold amount is based on your filing
status.
Filing Status
Married Filing Jointly
Qualified Widower with Dependent Child
Married Filing Seperately
Single or Head of Household
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Threshold Amount
$
250,000.00
$
250,000.00
$
150,000.00
$
200,000.00
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27. Line 15 & Line 16
Line 15:
• Subtract line 14 from line 13.
• If 0 or less, enter 0.
Line 16:
• Enter the smaller of line 12 or line 15.
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28. Line 17
Net Investment Income Tax for
individuals.
• Multiply line 16 by 3.8%.
• Enter here and in Form 1040, line 60.
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29. Estates/Trusts
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30. Line 18
A) Net Investment Income
• Line 12
B) Deductions for distributions of net
income and deductions under section
642(C).
C) Undistributed net investment income.
• Subtract line 18B from 18A.
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31. Line 19A
Adjusted Gross Income
Guidance on calculating an estate or trust's
AGI for regular tax purposes can be found in
the instructions to Form 1041, line 17.
• If the estate or trust does not own a CFC or PFIC,
enter the estate or trust's AGI for regular tax
purposes.
• If the estate or trust owns a CFC or PFIC, the trust or
estate may need to modify its regular tax by making
adjustments with respect to income derived from
certain CFCs and PFICs.
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32. Line 19B & Line 19C
Line 19B:
• Highest tax bracket for estates and trusts for the year.
• For the highest tax bracket for estates and trusts for
the year, see Form 1041, Schedule G instructions for
the tax rate schedule.
Line 19C:
• Subtract line 19B from 19A
• If 0 or less, enter 0.
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33. Line 20 & Line 21
Line 20:
• Enter the smaller of either line 18C or 19C.
Line 21:
• Net Investment Income Tax for Estates and Trusts.
• Multiply line 20 by 3.8%.
• Enter here and on form 1041, schedule G, line 4.
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34. Appendix
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35. Netting Losses for NIIT
Final Reg.§1.1411-4(d)
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36. Example – Regular Tax
Sale of Business (LTCG)
$100,000
Portfolio Loss (LTCL)
($60,000)
Net LTCG
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$40,000
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37. Example – Net Investment Income Tax
Sale of Business (LTCG)
Portfolio Loss (LTCL)
Net Investment Income
Excluded from NII
($60,000)
$0
*NII can never be a negative number. The computation
ends at zero. The $60,000 loss is lost forever and
cannot be carried forward.
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38. Sections 67 & 68 Limitations
for NIIT
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39. Sections 67 & 68 Limitations –
Regular Income Tax Purposes
Section 67 – 2% Floor on Miscellaneous Itemized
Deductions: For regular income tax purposes, the
miscellaneous itemized deductions are only allowed
to the extent that the aggregate of such deductions
exceeds 2% of AGI.
Section 68 – Overall Limitation on Itemized
Deductions: For regular income tax purposes, Pease
cuts itemized deductions by 3% of AGI above a
certain threshold amount (up to a maximum of 80%).
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40. Sections 67 & 68 Limitations –
Net Investment Income Tax Purposes
Any deduction allowed against net investment
income that, for purposes of computing your regular
income tax, is subject to either the 2% floor on
miscellaneous itemized deductions (section 67) or
the overall limitation on itemized deductions
(section 68) is allowed in determining net investment
income, but only to the extent the items are
deductible after application of both limitations.
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41. Miscellaneous Itemized Deductions –
Net Investment Income Tax Purposes
The amount of your miscellaneous itemized
deductions, after application of the 2% floor but
before application of the overall limitation, used in
determining your net investment income is the
lesser of:
• That portion of your miscellaneous itemized deductions before
the application of the 2% floor that is properly allocable to net
investment income, or
• Your total miscellaneous itemized deductions allowed after the
application of the 2% floor but before the application of the
overall limitation on itemized deductions.
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42. Itemized Deductions –
Net Investment Income Tax Purposes
The amount of your itemized deductions allowed in
determining your net investment income after
applying both the 2% floor and overall limitation is
the lesser of:
• The sum of:
- 1. The amount of your miscellaneous itemized deductions
allowed as a deduction against your net investment income
(before application of the overall limitation), and
- 2. The total amount of your itemized deductions that are not
subject to the 2% floor and are properly allocable to items of
income or net gain for purposes of determining your net
investment income, or
• The total amount of your itemized deductions allowed
after the application of both the 2% floor and the
overall limitation on itemized deductions.
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43. Itemized Deductions –
Net Investment Income Tax Purposes
Example
• Gary and Barbara have a passive interest in a number of
investments which generate investment income of
$50,000. Assume the Surtax applies to NII.
• $5000 of expenses attributable the investments are
miscellaneous expenses.
• $25,000 of expenses attributable the investments are
itemized deductions not subject to the 2% floor.
• Matt and Mary in total will itemize $50,000 in deductions
after taking into account the 2% limitation on
miscellaneous deductions and reducing their deductions
for PEASE.
• A deduction of $30,000 ($25,000+$5000<$50,000) is
allowed against NII.
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44. Required Disclosure Under Circular 230
Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated
by the United States Department of the Treasury, nothing contained in this
communication was intended or written to be used by any taxpayer for the purpose of
avoiding penalties that may be imposed on the taxpayer by the Internal Revenue
Service, and it cannot be used by any taxpayer for such purpose. No one, without
our express prior written permission, may use or refer to any tax advice in this
communication in promoting, marketing, or recommending a partnership or other
entity, investment plan or arrangement to any other party.
For discussion purposes only. This work is intended to provide general information
about the tax and other laws applicable to retirement benefits. The author, his firm or
anyone forwarding or reproducing this work shall have neither liability nor
responsibility to any person or entity with respect to any loss or damage caused, or
alleged to be caused, directly or indirectly by the information contained in this work.
This work does not represent tax, accounting, or legal advice. The individual
taxpayer is advised to and should rely on their own advisors.
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45. Resources for Post-ATRA & NIIT Planning
Planning After ATRA and the Net Investment Income Tax Toolkit
•
•
•
aicpa.org/pfp/proactiveplanning
Complimentary PFP Section member/PFS credential holder benefit
Includes Bronze Edition of Tax Evaluator, infographic on tax brackets, planning
ideas to use in client meetings, client communication templates,
webcast/podcast archives, and more!
Other Resources for Purchase from Bob Keebler (www.cpa2biz.com)
•
•
Tax Planning After the Healthcare Surtax: Tools, Tips, and Tactics*
The Rebirth of Roth: A CPA's Ultimate Guide for Client Care*
Now Available! More Resources for Purchase from Bob Keebler*
(www.cpa2biz.com)
•
•
Planning Opportunities After ATRA: Tools, Tips, and Tactics (PTX1307M)
Tax Rate Evaluator: A Graphical Calculator for Tax Planning After ATRA
(PTX1306M)
Visit aicpa.org/pfp/join to become a member
*discounts available for PFP/PFS members
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