Net Investment Income Tax

[Tennisbum1]

Q: I sold my financial planning business in 2023 via an installment sale.

-On my 2023 return TT subtracted the installment sale gain on Form 8960's line 5b, thereby not subjecting the gain to the NIIT. However, on my 2024 return ( year 2 of the installment sale), the year's gain was not subtracted on line 5b and thus was subjected to the NIIT.

I am at a loss for understanding why the installment sale gain wasn't subject to the NIIT in 2023 (the year of sale) but was subjected to the NIIT in year 2.

Can anyone clarify this for me?

[DianeW777]

It depends on the income level of the net investment income and your modified adjusted gross income (MAGI).  See the amounts based on filing status below.

Individuals:  In the case of an individual, the NIIT is 3.8 percent on the lesser of:

• the net investment income, or
• the excess of modified adjusted gross income over the following threshold amounts:
  • $250,000 for married filing jointly or qualifying surviving spouse
  • $125,000 for married filing separately
  • $200,000 for single or head of household
    • Net Investment Income Tax (NIIT) FAQs
    • What is Form 8960-NIIT?

[Tennisbum1]

Thanks Diane for responding to my question.

My MAGI was well above the $ 250k threshhold in both years.

Any other thoughts would be appreciated. Could it be that the gain isn't subject to the NIIT in the year the sale was made (2023) but its subject to the NIIT in subsequent years?

[DianeW777]

No, it wouldn't be subject to it in one year and not the other unless there was a tax law change. The instructions seem to indicate the the sale of your financial planning business, because it was involved as Section 1411 trade or business is not exempt from the net investment tax credit (NIIT). 

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.

• Trade or business income subject to net investment income tax (NIIT).  Line 4a of Form 8960 was amended to bring attention to certain income reported on Schedule C (Form 1040) and Schedule E (Form 1040) that is subject to NIIT. This change was made to the instructions for Form 8960 in tax year 2022 to better reflect section 1411(c)(2).
  • US Code Section 1411

[Tennisbum1]

Hi Diane,

Thanks again for your input. I apologize for not replying sooner as I have been away.

The businees I sold is financial planning and advisory. We were not dealers or brokers, although we were appointed LPOA by some of our clients to execute ETF or mutual fund trades on their behalf with their custodian.

I am not aware of any tax law change form 2023 to 2024 and am still at a loss why the year 2 installment sale gain was subjected to the NIIT when it wasn't in 2023 (the year of disposition).  Any additional thoughts?

I appreciate your interest.

[DaveF1006]

It depends. Here are some reasons why your Year 2 sale gain was taxed at NIIT when it wasn't in the year you sold it.

1. Thresholds and Modified Adjusted Gross Income (MAGI): NIIT applies if your MAGI exceeds certain thresholds ($250,000 for married filing jointly, $200,000 for single filers, etc.). If your MAGI in Year 2 exceeded the threshold, the installment sale gain could have triggered the NIIT, even if it didn’t in the year of disposition.
2. Installment Sale Timing: Installment sales spread the gain over multiple years, and each year’s portion is treated as income for that year. If your Year 2 income, including the installment gain, pushed you over the NIIT threshold, it could explain why it was taxed.

Check your Modified adjusted gross income for 2024.  If it exceeds the threshold amounts listed above,  this may be the reason you were subject to NIIT.

[Tennisbum1]

Hi Dave,

Thanks for weighing in. My MAGI is above the $ 250k threshold for both years.

The yearly installment sale gains are correctly shown on Line 5A of Form 8960 in both years but only in 2023 is the gain subtracted on Line 5B (Gains on disposition of property not subject to NIIT).

Very puzzling.