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2018

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.

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 Form8960.

What's New

Global intangible low-taxed income (GILTI). Public Law 115-97 enacted new section 951A, which requires U.S. shareholders of controlled foreign corporations to determine and include their GILTI in gross income every year. Section 951A is effective for tax years of foreign corporations beginning after 2017 and to tax years of U.S. shareholders in which or with which such tax years of foreign corporations end. See Form 8992 and section 951A for more information.

Treatment of deferred foreign income upon transition to participation exemption system of taxation. Public Law 115-97 amended section 965, which requires U.S. shareholders to include the untaxed foreign earnings of certain specified foreign corporations in taxable income as if those earnings had been repatriated to the United States. See Form 965 and section 965 for more information.

Miscellaneous itemized deductions suspended for tax years 2018 through 2025. Miscellaneous itemized deductions under section 67 are not allowed for tax years beginning after 2017 and before 2026. See section 67(g).

Overall limitation on itemized deductions suspended for tax years 2018 through 2025. The overall limitation on itemized deductions under section 68 does not apply for tax years beginning after 2017 and before 2026. See section 68(f).

We continue to discuss

! miscellaneous itemized

CAUTION deductions under section 67 (and the 2% limitation) and the overall limitation on itemized deductions under section 68, however, they are suspended for tax years 2018 through 2025.

Note. Notice 2018-61 announces that the Department of Treasury and the IRS intend to issue regulations providing

clarification of the effect of section 67(g) on the deductibility of certain expenses described in section 67(b) and (e) and section 1.67-4 of the regulations that are incurred by estates and nongrantor trusts. These regulations will clarify that estates and nongrantor trusts may continue to deduct each expense that is described in section 67(e)(1) or is allowable under section 642(b), 651, or 661, including the appropriate portion of a bundled fee, in determining the estate's or nongrantor trust's adjusted gross income for all tax years, even while the application of section 67(a) is suspended under section 67(g). Additionally, the regulations will clarify that deductions enumerated in section 67(b) and (e) continue to remain outside the definition of "miscellaneous itemized deductions" and thus are unaffected by section 67(g).

General Instructions

Reminder

These instructions are based mostly on Regulations sections 1.1411-1 through 1.1411-10.

Who Must File

Attach Form 8960 to your return if your modified adjusted gross income (MAGI) is greater than the applicable threshold amount.

Purpose of Form

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

Definitions

Controlled foreign corporation (CFC). Generally, a CFC is any foreign corporation if more than 50% of its voting power or stock value is owned or considered owned by U.S. shareholders (as defined in section 951(b)) on any day during the tax year. Certain foreign insurance companies are considered CFCs if more than 25% of their voting power or stock value is owned or considered owned by U.S. shareholders (as defined in section 951(b)) on any day during the tax year. See section 957(a) and (b). Additionally, certain foreign insurance companies with related person insurance income may be CFCs. See section 953(c).

Excluded income. Excluded income means:

? Income excluded from gross income in

chapter 1 of the Internal Revenue Code;

? Income not included in net investment

income; and

? Gross income and net gain specifically

excluded by section 1411, related regulations, or other guidance published in the Internal Revenue Bulletin.

Examples of excluded items are:

? Wages, ? Unemployment compensation, ? Alaska Permanent Fund Dividends, ? Alimony, ? Social security benefits, ? Tax-exempt interest income, ? Income from certain qualified retirement

plan distributions, and

? Income subject to self-employment

taxes.

Net investment income. Generally, net investment income 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. In addition, net investment income includes other gross income derived from a trade or business that's (a) a passive activity, or (b) a trade or business of trading in financial instruments or commodities. Additionally, net investment income 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. To arrive at net investment income, the above items are reduced by deductions allowed against the income tax which are properly allocable to those items of gross income or net gain. See section 1411(c) and Regulations sections 1.1411-4 and 1.1411-10(c).

Passive foreign investment company (PFIC). Generally, a PFIC is any foreign corporation if at least 75% of its gross income is passive income or an average of at least 50% of its assets produce passive income or are held for the production of passive income. See section 1297(a).

Qualified electing fund (QEF). Generally, a QEF is a PFIC for which the

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taxpayer has made an election under section 1295(b) and the PFIC complies with IRS requirements for determining ordinary earnings and net capital gain. See section 1295(a).

Section 1.1411-10(g) election. An election made under Regulations section 1.1411-10(g) (section 1.1411-10(g) election). See Regulations Section 1.1411-10(g) Election, later.

Section 1411 trade or business. Generally, a trade or business that's either a passive activity for the taxpayer or is a trade or business of trading in financial instruments or commodities. See section 1411(c)(2) and Regulations section 1.1411-5(a).

Recordkeeping

For the NIIT, certain items of investment income and investment expense receive different treatment than for the regular income tax. Therefore, you need to keep all records and worksheets for the items you need to include on Form 8960. Keep all records for the entire life of the investment to show how you calculated basis. You'll need to know what you did in prior years if the investment was part of a carryback or carryforward.

Application to Individuals

U.S. citizens and residents. Individuals who have for the tax year (a) MAGI that's over an applicable threshold amount, and (b) net investment income, must pay 3.8% of the smaller of (a) or (b) as their NIIT.

The applicable threshold amount is based on your filing status.

? Married Filing Jointly or Qualifying

Widow(er) is $250,000.

? Married Filing Separately is $125,000. ? Single or Head of Household is

$200,000.

Nonresidents. The NIIT doesn't apply to nonresident alien (NRA) individuals. If you're a U.S. citizen or resident married to an NRA, your filing status will be married filing separately for purposes of determining your MAGI, net investment income, and whether you're subject to the NIIT. However, see information, later, about certain elections to file jointly with NRA spouses.

Dual-resident individual. If you're a dual-resident individual, within the meaning of Regulations section 301.7701(b)-7(a)(1), generally you'll be treated as a U.S. resident for purposes of the NIIT. However, you'll be treated as an NRA for purposes of the NIIT if:

? You determine you would be treated as

a resident of a foreign country for purposes of an income tax treaty between the United States and that foreign country;

? You elect to be treated as a resident of

the foreign country for purposes of computing your U.S. income tax liability; and

? You file Form 1040NR, U.S.

Nonresident Alien Income Tax Return, and Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), as provided in Regulations section 301.7701(b)-7(b).

Dual-status individual. If you were a dual-status individual--that is, an individual who was a resident of the United States for part of the year and an NRA for the other part of the year--you're subject to the NIIT only for the portion of the year you were a U.S. resident. The relevant threshold amount isn't reduced or prorated for a dual-status individual.

If you were a U.S. resident on the last day of the tax year, file Form 1040 and attach a statement showing your income for the part of the year you were a nonresident. You can use Form 1040NR as the statement.

If you were a nonresident on the last day of the tax year, file Form 1040NR and attach a statement showing your income for the part of the year you were a U.S. resident. You can use Form 1040 as the statement.

For more information, see the Instructions for Form 1040NR and Pub. 519, U.S. Tax Guide for Aliens.

Election To File Jointly With Nonresident Spouse--Section 6013(g) or 6013(h)

If you and your spouse elect to file a joint return under section:

? 6013(g) (where an NRA is married to a

U.S. citizen or resident at the end of the tax year); or

? 6013(h) (where at least one spouse

was an NRA at the beginning of the tax year, but is a U.S. citizen or resident married to a U.S. citizen or resident at the end of the tax year); you can also elect to apply the joint return election for NIIT purposes. If you made a 6013(g) or 6013(h) election, but don't elect to apply the joint return election for NIIT purposes, then, for NIIT purposes, you'll file as married filing separately.

To make either election for NIIT purposes, use your combined items of income, gain, loss, and deduction from your joint return to figure your net investment income and MAGI; use the married filing joint return applicable threshold amount ($250,000); and check the appropriate checkbox near the top of Form 8960, Part I.

Once you make either election, its duration and termination is governed by sections 6013(g) and 6013(h), respectively, and related regulations.

You can make either election on an amended return only if the tax year for which you're making the election, and all tax years affected by the election, aren't closed by the period of limitations on assessment under section 6501.

If you elect to apply a section 6013(g) election for NIIT purposes and later determine that you didn't meet the criteria for doing so in that tax year, your election for NIIT purposes will have no effect that year and for all future years. However, if, in a later year, you meet the criteria to elect to apply your section 6013(g) election for NIIT purposes, you'll be treated as though you did elect to apply your section 6013(g) election in that later year unless you file (or amend) your return for that later year to report your NIIT without the election for NIIT purposes.

Application to Estates and Trusts

Domestic estates and trusts. The NIIT applies to estates and trusts that have undistributed net investment income and adjusted gross income (AGI) in excess of the threshold amount. The NIIT is 3.8% of the lesser of:

? The undistributed net investment

income for the tax year; or

? The excess, if any, of AGI (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 tax year. See the instructions for Form 1041, Schedule G, line 1a, and the instructions for Form 1041-QFT, line 12, for the dollar amount at which the highest tax bracket begins for the tax year.

Exception for certain domestic trusts. The following trusts aren't subject to the NIIT.

? Trusts that are exempt from income

taxes imposed by Subtitle A of the Internal Revenue Code.

1. Charitable trusts and qualified retirement plan trusts exempt from tax under section 501.

2. Charitable Remainder Trusts exempt from tax under section 664.

? A trust or decedent's estate in which all

of the unexpired interests are devoted to one or more of the purposes described in section 170(c)(2)(B).

? Trusts that are classified as "grantor

trusts" under sections 671?679.

? Electing Alaska Native Settlement

Funds (described in section 646).

? Perpetual Care (Cemetery) Trusts

(described in section 642(i)).

? Trusts that aren't classified as "trusts"

for federal income tax purposes. For example:

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Instructions for Form 8960 (2018)

1. Real Estate Investment Trusts, and

2. Common Trust Funds.

Special computational rules for qualified funeral trusts (QFTs). The NIIT applies to the QFT (as defined in section 685) by treating each beneficiary's interest in that beneficiary's contract as a separate trust. Complete one consolidated Form 8960 for all beneficiary contracts subject to NIIT.

If a QFT has one or more beneficiary contracts that have net investment income in excess of the threshold amount:

? Complete Form 8960, lines 1?12, using

only the sum of the net investment income of the beneficiary contracts that have net investment income in excess of the threshold amount; and

? On line 19b:

1. Insert the number of beneficiary contracts that have net investment income in excess of the threshold amount next to the entry on the line, and

2. Multiply the number of beneficiary contracts that have net investment income in excess of the threshold amount by the threshold amount for the year and enter that amount on line 19b.

Example. For 2018, a QFT has a beneficiary contract with $14,000 of interest income and another beneficiary contract with $13,000 of dividend income. Neither contract has any properly allocable deductions. The threshold amount for the 2018 tax year is $12,500. Therefore, the QFT has two beneficiary contracts with net investment income in excess of the threshold amount for the year.

The QFT will report $14,000 on line 1 (interest) and $13,000 on line 2 (dividends). Lines 12, 18a, and 19 would each be $27,000 ($14,000 plus $13,000). Enter "2" on the dotted line at the end of line 19b and enter $25,000 ($12,500 ? 2) on the entry line for 19b. Lines 19c and 20 will be $2,000 ($27,000 less $25,000). On line 21, enter the NIIT liability of $76.00 ($2,000 ? 3.8% (0.038)).

Special computational rules for electing small business trusts (ESBTs). The NIIT has special computational rules for ESBTs. In general, ESBTs compute their NIIT in 3 steps.

1. The ESBT separately calculates the undistributed net investment income of the S portion and non-S portion according to the general rules for trusts under chapter 1 of the Code, and then combines the undistributed net investment income of the S portion and the non-S portion. In the case of an ESBT that has an S portion and a non-S portion, complete lines 1?11 of Form 8960 using the items from the non-S portion, and add undistributed net

investment income of the S portion to net investment income on line 7.

2. The ESBT determines its AGI, solely for purposes of NIIT, by adding the net income or net loss from the S portion to the AGI of the non-S portion as a single item of income or loss. See the instructions for line 19a for more information.

3. To determine whether the ESBT is subject to NIIT, the ESBT compares the combined undistributed net investment income with the excess of its AGI over the section 1(e) threshold.

For an ESBT with only S

TIP corporation income (no non-S

portion), complete Form 8960 using the items from the S portion. For ESBTs with an S portion and a non-S portion, use Form 8960 as a worksheet for calculating the amounts to enter on line 7 and line 19a. On the S portion's Form 8960 worksheet, enter the S portion's net investment income on line 7 of the trust's Form 8960 and combine line 19a of the Form 8960 worksheet with the non-S portion's AGI to arrive at the amount on line 19a.

See Regulations section 1.1411-3(c) for more details and examples.

Special computational rules for bankruptcy estates of an individual. A bankruptcy estate of an individual debtor is treated as an individual for purposes of the NIIT. Regardless of the actual marital status of the debtor, the applicable threshold for purposes of determining the NIIT is the amount applicable for a married person filing separately.

Distributions from foreign estates and foreign trusts. If you're a U.S. person who receives a distribution of income from a foreign estate or foreign trust, generally, you must include the distribution in your net investment income calculation to the extent that the income is included in your AGI for regular income tax purposes. However, you don't need to include any distributions of accumulated income that you receive from a foreign trust.

Note. The NIIT doesn't apply directly to foreign estates or foreign trusts.

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 469. A passive activity includes any trade or business in which you don't materially participate. A passive activity also includes any rental activity, regardless of whether you materially participate. There are limited exceptions

for rentals. See the discussion on rentals, later. For more details on passive activities, see the Instructions for Form 8582, Passive Activity Loss Limitations, and Pub. 925, Passive Activity and At-Risk Rules.

Trade or Business Activities

The definition of trade or business for NIIT 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 activity for purposes of the passive activity loss rules. For example, under the passive activity loss rules, 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 aren't passive activities under section 469 will be included in net investment income because the activity doesn't 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 nonpassive for purposes of section 469 before the income is excluded from the NIIT. If you own an interest in a pass-through entity, the determination of whether that's a trade or business is made at that entity's level.

Real Estate Professionals

If you're a real estate professional for purposes of section 469(c)(7), your rental income or loss won't be passive if you materially participated in the rental real estate activity. For additional information on real estate professionals, see section 469(c)(7) and Pub. 925.

However, your rental income is included in net investment income if the income isn't derived in the ordinary course of a trade or business. Qualifying as a real estate professional doesn't necessarily mean you're engaged in a trade or business with respect to the rental real estate activities. If your rental real estate activity isn't a section 162 trade or business or you don't materially participate in the rental real estate activities, the rental income will be included in NIIT.

Safe Harbor for Real Estate Professionals

You qualify for the safe harbor if you're a real estate professional for purposes of section 469 and you:

? Participate in each rental real estate

activity for more than 500 hours during the tax year, or

? Participated in a rental real estate

activity for more than 500 hours in any 5 tax years (whether or not consecutive) during the 10 tax years immediately prior to this tax year.

Instructions for Form 8960 (2018)

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If you qualify, your gross rental income from your rental real estate activity is treated as though derived in the ordinary course of a trade or business and isn't included in your net investment income. If you qualify in the year you dispose of the property used in the rental real estate activity, the amount of gain or loss from the disposition is also deemed to be derived from property used in the ordinary course of a trade or business and isn't included in your net investment income.

Note. For real estate professionals with a Regulations section 1.469-9(g) election in effect, all of your rental real estate activities constitute a single activity for purposes of applying the 500-hour test described in Safe Harbor for Real Estate Professionals, earlier.

Note. If you`re a real estate professional under section 469(c)(7), but you're unable to satisfy the qualifications for the safe harbor, you're not precluded from establishing that the gross income and gain or loss from the disposition of property associated with your rental real estate activity isn't included in net investment income.

Special Rules for Certain Rental Income

For income tax purposes, Regulations section 1.469-2(f)(6) generally recharacterizes what otherwise would be passive rental income from a taxpayer's property as nonpassive where the taxpayer rents the property for use in a trade or business in which the taxpayer materially participates. Similarly, for income tax purposes, a rental activity that's properly grouped with a trade or business activity in which the taxpayer materially participates under Regulations section 1.469-4(d)(1) is a nonpassive activity. For purposes of calculating your net investment income, the gross rental income in both of these situations is treated as though it's derived in the ordinary course of a trade or business. Further, upon the disposition of the assets associated with the rental activity, any gain or loss is also treated as gain or loss attributable to the disposition of property held in a nonpassive trade or business and not included in your net investment income.

Treatment of Former Passive Activities

A former passive activity is any activity that was a passive activity in a prior tax year but it isn't a passive activity in the current year. A prior tax year's unallowed loss from a former passive activity is allowed to the extent of current year income from the activity. For purposes of determining your net investment income,

suspended losses from former passive activities are allowed as a properly allocable deduction, but only to the extent nonpassive income from the same activity is included in your net investment income in that year. For more information, see Regulations section 1.1411-4(g)(8) and examples.

Disposition of Entire Interest

If you disposed of your entire interest in a passive activity or a former passive activity to an unrelated person in a fully taxable transaction, your losses allocable to the activity for that year aren't limited by the passive activity loss rules for income tax purposes. A fully taxable transaction is a transaction in which you recognize all realized gain or loss. For purposes of calculating your net investment income, these losses may be properly allocable deductions, depending on the underlying character and origin of the losses.

Note. If you dispose of an activity that's always been a passive activity, the suspended passive losses from that activity are allowed in full as a properly allocable deduction.

Note. If you dispose of an activity that's a former passive activity, any suspended passive losses allowed in the year of disposition by reason of section 469(f)(1) (A) are included as properly allocable deductions, but only to the extent the gain on the disposition of the activity is included in net investment income (before taking into account any suspended losses). Any suspended passive losses that are allowed by reason of section 469(g) are allowed as additional properly allocable deductions.

Economic Grouping

You can treat one or more trade or business activities, or 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 Pub. 925.

Regrouping rules. 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 the NIIT. The proper grouping of a rental activity with a trade or business activity generally won't convert any gross income from rents into gross income derived from a trade or business.

Generally, you may not regroup activities unless your grouping was clearly inappropriate when originally made, or has become clearly inappropriate because of changed facts and circumstances. However, under the NIIT "fresh start" election you may regroup for the first tax

year you're subject to the NIIT (without the effect of the regrouping). You may regroup only once under this election and that regrouping will apply to the tax year for which you regroup and all future tax years. If you're subject to the NIIT for 2013 and you don't regroup, you may make the election for the first tax year beginning after 2013 that you're subject to the NIIT.

You may regroup on an amended return, but only if you weren't subject to the NIIT on your original return (or previously amended return), and if, because of a change to the original return, you owe NIIT for the year. For additional rules regarding regrouping on amended returns, see Regulations section 1.469-11(b)(3)(iv)(C).

Disclosure requirements. Regroupings under the NIIT "fresh start" are subject to the disclosure requirements of Rev. Proc. 2010-13.

Disposition of Partnership Interest or S Corporation Stock

In general, an interest in a partnership or S corporation isn't property held for use in a trade or business and, therefore, gain or loss from the sale of a partnership interest or S corporation stock is included in your net investment income.

Adjustment

The amount of the gain or loss from the disposition for regular income tax purposes is included on Form 8960, line 5a, as a gain or loss. If you materially participated (as defined under the passive activity loss rules) in a trade or business activity of the partnership or S corporation (or one of its subsidiaries) and that trade or business activity isn't the trade or business of trading in financial instruments or securities, then you must calculate the adjustment to report on line 5c. The adjustment described below only applies to dispositions of equity interests in partnerships and stock in S corporations and doesn't apply to gain or loss recognized on, for example, indebtedness owed to the taxpayer by a partnership or S corporation.

For more information on how to calculate the adjustment to report on line 5c, see Proposed Regulations section 1.1411-7.

Note. If the tax basis of the interest in the partnership or S corporation for NIIT purposes is different than for regular income tax purposes due to certain adjustments associated with income from CFCs or QEFs, the amount of gain or loss may exceed the amount reported for regular income tax purposes.

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Instructions for Form 8960 (2018)

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