What is a passive income deduction (as it relates to NII MAGI)?

[dvallett]

I'm having trouble with the passive income deduction add-back to calculate MAGI for the purposes of NIIT exposure. I'm retired, over 65. My income consists primarily of pension and SS, to a lesser extent some IRA distributions, and to a much lesser extent interest and dividends. A) Are any of these considered 'passive income' for income tax purposes? B) If so, when/why would they ever be an AGI deduction that would have to be added back to get to MAGI? I'm sure I'm missing something basic or obvious but despite lots of searching can't find anything conclusive.

[rjs · Accepted solution]

Where exactly are you seeing anything about adding back a passive income deduction to calculate MAGI for Net Investment Income Tax (NIIT)? In the IRS Instructions for Form 8960 (Net Investment Income Tax) there is a simple 4-line worksheet on page 20 for calculating MAGI. It doesn't say anything about passive income, unless you own stock in a passive foreign investment company (PFIC).

On page 19, the instructions for Form 8960 line 13, which is MAGI, say the following.

"If you didn't exclude any amounts from your gross income under section 911 [foreign earned income] and you don't own a CFC [controlled foreign corporation] or PFIC, your MAGI is your AGI as reported on Form 1040 or 1040-SR."

At the end of the instructions for line 13 it says the following.

"TIP If you don't own (directly or indirectly) any interests in CFCs or PFICs, and don't exclude any foreign earned income on Form 2555, Foreign Earned Income, enter your AGI from Form 1040 or 1040-SR on line 13."

If your income is as simple as you describe it, it would appear that your MAGI for NIIT (Form 8960 line 13) is your AGI, without any additions or subtractions.

There are about a dozen different definitions of MAGI, depending on what it's being used for. Are you possibly looking at the definition of MAGI for something other than NIIT?

[dvallett]

Thanks - that's really helpful and much appreciated. What threw me was multiple well respected financial websites that showed only "passive income or loss" in a laundry-list of deductions to add back to AGI when calculating MAGI, without specifying what TYPES of passive income or loss.