Calculation Error on Additional Net Investment Income Tax of 3.8%

[MichiganCanary]

About to file when i found my additional net investment income tax of 3.8% of the amount over $250k included social security and wages. Turbo tax is taking the AGI amount from 1040 line 11, and inputting it directly onto line 13 on form 8960, whereas according to the irs this amount should be less social security, wages, etc which are not part of investment income. Anyone paying the additional Net Investment Income Tax of 3.8% is likely overpaying if relying on Tubotax

[MichiganCanary]

Have just gone back through Turbotax for the past 5 years, and this error (in my opinion) has been there at least back through 2017, costing people extra taxes.

[AmyC]

Let's make sure we are looking at the same thing. In About Form 8960, Net Investment Income Tax Individuals, Estates, and Trusts, are the form and directions for this year. Net Investment Income Tax charges an extra 3.8% depending on your income and filing status exceeding the thresholds. This is calculated by using line 13, your actual MAGI and subtracting line 14, the threshold limits. If zero or less, then you are not subject to the NII. If your MAGI exceeds the limits, then the form moves on to just investment income to tax the additional amount.

From the directions:

[MichiganCanary]

Thanks for the info. In the IRS answers it specifically says wages and social security are not part of NIIT, but in the worksheet you included it does include them. In the Turbotax notes on line 13 on 8960 where it says what is included, it does not say wages or social security. The fact that this is supposed to be an additional tax for high INVESTMENT income individuals, combined with the IRS answers about it, makes me wonder if the intent is being wrongly calculated in the worksheet?

[JohnW152]

You’re only looking at part of the picture.  Net investment income tax is based on lines 12 through 16 of Form 8960; you’re only looking at line 13.

Let’s look at this, step by step.

Line 12 is your net investment income.

Line 13 represents your Modified AGI (MAGI) which, yes, does include wages and taxable social security.

Line 14 is the threshold amount mentioned by AmyC, above.

Line 15 subtracts the threshold amount (line 14) from MAGI, line 13.

THEN…  and this is important… Line 16 is the smaller of line 15 and line 12, your net investment income.  

See what’s happening?  If net investment income is smaller than MAGI minus the threshold, you compute NIIT based on net investment income.

If MAGI minus the threshold is smaller than net investment income, you pay NIIT based on an amount smaller than net investment income.  

So, the maximum amount you can pay NIIT on is your net investment income, but in some cases, it’ll be based on an amount smaller than your net investment income.

Here’s the relevant portion of Form 8960:

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[MichiganCanary]

I understand the worksheet and instructions, but just wondered if that is really the intent by the IRS to add the extra tax to wages and social security based on their answers on the subject.

[jtax]

I think I see the confusion here. These forms can make one's head hurt.

The 8960 only winds up taxing investment income. It never taxes wages or social security.

What line 13/14/15 are doing is figuring out whether or not the NII even applies. That calculation is based on all of your income not just investment income! Here's a screen shot from a test case with a lot of wage income but only $100 of investment income. The NII tax is only $4 ...

It isn't about what the IRS is trying to do. It is about how Congress wrote the law. See I.R.C. 1411(a)(1) and how the 8960 exactly maps to it. 

https://www.law.cornell.edu/uscode/text/26/1411 ...

you can see in 1441(a)(B)(i) it is your total income (adjusted a bit) not just your investment income. However you can't be taxed more than your NII.

From the statute:

In the case of an individual, there is hereby imposed (in addition to any other tax imposed by this subtitle) for each taxable year a tax equal to 3.8 percent of the lesser of—
(A) net investment income for such taxable year, or
(B) the excess (if any) of—
     (i)the modified adjusted gross income for such taxable year, over
     (ii)the threshold amount.