The IRS has finally released a draft of the new form 8960 to report the 3.8% net investment income tax for income in excess of the threshold amounts. As previously discussed in several posts, the 3.8% tax applies to the lesser of (1) your net investment income including cash rents or the amount in excess of $200/250,000 (single/MFJ).
The draft form is based on the proposed regulations that the IRS released last year, however, these are not yet final and the IRS did not issue any instructions for the new form.
There are three parts to the form:
- Part 1 calculates the amount of investment income. It takes certain lines directly from form 1040 or form 1041, which is straight-forward, however, it then requires you to make certain adjustments based on whether some or all of this income is actually investment income or not. (13 lines in total)
- Part 2 calculates the amount of allowable itemized deductions that may be used to offset investment income in part 1. The three categories are (1) investment interest, (2) state income taxes, and (3) miscellaneous itemized deductions. Of course, it is not just this simple, since there is an additional line for "additional modifications". (6 lines)
- Part 3 then is the calculation of the tax owed (if any). (14 lines).
In total, there are 33 lines that you must fill out in order to calculate the tax. If you normally prepare your own tax return and your gross income exceeds $250,000, we would highly recommend having a qualified tax advisor review or prepare this form. There is always discussion about simplifying the tax code, but as usual, the actual result is more complexity each year and this form is a prime example.