Open TurboTax

Why sign in to the Community?

  • Submit a question
  • Check your notifications
or and start working on your taxes
Announcements
Your taxes, your way. Get expert help or do it yourself. >> Get started
Close icon
Do you have a TurboTax Online account?

We'll help you get started or pick up where you left off.

cancel
Showing results for 
Search instead for 
Did you mean: 
Showtime1
Level 1

Net Investment Income Tax (NIIT)

I have dividend income from a LLC partnership in which I materially participate. My understanding is that because I materially participate in the LLC I am NOT subject to the 3.8% Net Investment Income Tax (NIIT) on this dividend income (i.e., it is NOT considered passive activity because I materially participate). However, TurboTax Deluxe 2021 appears to be including the income and calculating my NIIT accordingly. I can see where the electronic K-1 form in TurboTax has the "material participant" box checked, but it only appears to apply to ordinary business income ($0, in my case), not the dividend income. How do I get TurboTax to recognize the dividend income is NOT taxable because I materially participate in the LLC that issued my K-1?

8 Replies
Mike9241
Level 15

Net Investment Income Tax (NIIT)

don't know if this applies to you but there is a special rule for traders in financial instruments. income including interest, dividends, and capital gains from the trade or business of trading financial instruments such as stocks, bonds, options, forward or futures contracts or commodities is included in NII regardless of whether the business is a passive activity Reg 1.411-5(a)(2). the determination of this is made at the entity level.

(c) Trading in financial instruments or commodities -

(1) Definition of financial instruments. For purposes of section 1411 and the regulations thereunder, the term financial instruments includes stocks and other equity interests, evidences of indebtedness, options, forward or futures contracts, notional principal contracts, any other derivatives, or any evidence of an interest in any of the items described in this paragraph (c)(1). An evidence of an interest in any of the items described in this paragraph (c)(1) includes, but is not limited to, short positions or partial units in any of the items described in this paragraph (c)(1).

(2) Definition of commodities. For purposes of section 1411 and the regulations thereunder, the term commodities refers to items described in section 475(e)(2).

 

 

if this is not your situation and your dividends are exempt from the NIIT the adjustment is made through the 8960 on line 7

 

 

tagteam
Level 15

Net Investment Income Tax (NIIT)

The dividend income that is reported on Line 6a of your K-1 is most likely subject to the NIIT. For that purpose, it is largely irrelevant that you materially participate in the business of the multi-member LLC (except income received in the ordinary course of the LLC's business is obviously not subject to the NIIT).

 

Also, Form 8960 is only filed by individual taxpayers and estates/trusts.

Showtime1
Level 1

Net Investment Income Tax (NIIT)

Thanks for this! The situation does not apply per se but the instructions regarding how to make the adjustment (line 7 on form 8960) were very helpful.

Showtime1
Level 1

Net Investment Income Tax (NIIT)

I'm clinging to your words "most likely" in hopes there's a chance I can still avoid the NIIT.  I mean, you didn't say "definitely"  🙂

 

Seriously, is it your understanding that dividend income is not subjected to the same "material participation" tests as ordinary income? Therefore, I'll owe the NIIT?

tagteam
Level 15

Net Investment Income Tax (NIIT)


@Showtime1 wrote:

Seriously, is it your understanding that dividend income is not subjected to the same "material participation" tests as ordinary income? Therefore, I'll owe the NIIT?


In the vast majority of cases, dividend income would be considered investment income for the purposes of the NIIT as it is not typically derived in the ordinary course of the partnership's business.

Mike9241
Level 15

Net Investment Income Tax (NIIT)

this is what IRC 1411 says

The term “net investment income” means the excess (if any) of—
(A)the sum of—
(i)gross income from interest, dividends, annuities, royalties, and rents, other than such income which is derived in the ordinary course of a trade or business not described in paragraph (2),
(ii)other gross income derived from a trade or business described in paragraph (2), and
(iii)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 not described in paragraph (2), over
(B)the deductions allowed by this subtitle which are properly allocable to such gross income or net gain.
(2)Trades and businesses to which tax applies
A trade or business is described in this paragraph if such trade or business is—
(A)a passive activity (within the meaning of section 469) with respect to the taxpayer, or
(B)a trade or business of trading in financial instruments or commodities (as defined in section 475(e)(2)).

 

 

iRC 469(c)

(c)Passive activity defined
For purposes of this section—
(1)In general
The term “passive activity” means any activity—
(A)which involves the conduct of any trade or business, and
(B)in which the taxpayer does not materially participate.

 

reg 1.1411-5

2) Application of income recharacterization rules -

(i) Income and gain recharacterization. To the extent that any income or gain from a trade or business is recharacterized as “not from a passive activity” by reason of § 1.469-2T(f)(2), § 1.469-2(f)(5), or § 1.469-2(f)(6), such trade or business does not constitute a passive activity within the meaning of paragraph (b)(1)(ii) of this section solely with respect to such recharacterized income or gain.

(ii) Gain recharacterization. To the extent that any gain from a trade or business is recharacterized as “not from a passive activity” by reason of § 1.469-2(c)(2)(iii) and does not constitute portfolio income under § 1.469-2(c)(2)(iii)(F), such trade or business does not constitute a passive activity within the meaning of paragraph (b)(1)(ii) of this section solely with respect to such recharacterized gain.

(iii) Exception for certain portfolio recharacterizations. To the extent that any income or gain from a trade or business is recharacterized as “not from a passive activity” and is further characterized as portfolio income under § 1.469-2(f)(10) or § 1.469-2(c)(2)(iii)(F), then such trade or business constitutes a passive activity within the meaning of paragraph (b)(1)(ii) of this section solely with respect to such recharacterized income or gain.

 

 

'

to avoid tax issues it may be best to consult a tax pro who can further research this issue.

 

Dreshfield
New Member

Net Investment Income Tax (NIIT)

Where would I find Net Investment Income Tax (NIIT) in Turbo Tax Premier 2021.  I looked "Other Tax Situations" under Federal Taxes tab but could not find it.

Mike9241
Level 15

Net Investment Income Tax (NIIT)

if it's applicable Turbotax will compute it from your entries. if adjustments are needed, you'll get to that section 

when you get to other tax situations and under that additional taxes and repayments

the computation of the tax, if applicable, is on form 8960

About Community

Learn about taxes, budgeting, saving, borrowing, reducing debt, investing, and planning for retirement.

3.48m
Members

2.6m
Discussions

Manage cookies
v