Why is social security included in investment income for form 8960 investment income calculation

[rickelizrusso]

My MAG includes social security so my income is above the $250,000 threshold and subject to the 3.8% additional tax.  I would not consider social security as investment income?

[CherylW · Accepted solution]

Your MAGI isn't limited to investment income.  It's your adjusted gross income, plus or minus certain adjustments.

MAGI includes the taxable portion (in your case, 100%) of your total social security income.  Only SSI is excluded from MAGI.

This, from IRC.A.1.A.IV.C.36B:

(B) Modified adjusted gross income  The term “ modified adjusted gross income ” means adjusted gross income increased by—

(i) any amount excluded from gross income under section 911,

(ii) any amount of interest received or accrued by the taxpayer during the taxable year which is exempt from tax, and (iii) an amount equal to the portion of the taxpayer’s social security benefits (as defined in section 86(d)) which is not included in gross income under section 86 for the taxable year.

[rickelizrusso]

Form 8960 bases the 3.8 additional tax on modified adjusted gross income which includes social security which I don't think should be treated as investment income.  TT computes the investment income which is correct but then under Part 111 puts in magi which is incorrect???

[CherylW]

Investment Income only includes the types of income listed in Part I of Form 8960.  

In Part III, the tax is based on the lower of Investment Income (which does not include SS) or the amount your MAGI exceeds the threshold.  So if your investment income is more than the amount your MAGI exceeds the threshold then the tax is actually (and correctly) computed on a portion of your MAGI including Social Security rather than on investment income.

[CherylW]

Social security income is not being treated as investment income, but it is part of the calculation to arrive at MAGI. 

Turbo Tax is correctly doing the calculations of your MAGI.  

[SCW]

Why does instructions for Form 8960 list Social Security benefits as excluded item for Form 8960?