Here’s what HIVE AI had to say about “Net investment income tax calculations for high-income clients”:

Net Investment Income Tax (NIIT) calculations for high‑income clients

Who is subject to NIIT and how it’s computed

Individuals owe a 3.8% tax on the lesser of: (a) their net investment income (NII), or (b) the excess of modified adjusted gross income (MAGI) over the statutory threshold ($200,000 single, $250,000 MFJ, $125,000 MFS; not indexed). Estates and trusts pay 3.8% on the lesser of undistributed NII or AGI over the trust threshold. File Form 8960; the NIIT flows to Schedule 2 of Form 1040. 1 2 3

What counts as net investment income

NII includes interest, dividends, annuities, rents, royalties, passive income from trades or businesses, and net gains from property dispositions (to the extent included in taxable income), reduced by properly allocable deductions. It excludes income derived in the ordinary course of a non‑passive trade or business. 4

Common inclusions for individuals

Interest and dividends; capital gains (including from sales of stocks, funds, and other investment property) 4
Passive K‑1 income from partnerships/S corps; rental income; royalty income 4

Properly allocable deductions

Investment interest expense, investment advisory fees and other investment expenses (subject to applicable deduction limitations), state income tax allocable to investment income, and other costs properly connected to producing NII, following the ordering and limitation rules in the regulations. 5

Core calculation framework and examples

Individual calculation steps

Compute MAGI (AGI plus certain add‑backs) and determine the excess over the threshold.
Compute NII: sum investment income and net gains, then subtract properly allocable deductions.
NIIT equals 3.8% of the lesser of the two amounts. 1
Example: Single filer with $180,000 wages and $90,000 passive partnership income has MAGI $270,000; excess over $200,000 is $70,000. NII is at least $90,000. NIIT is 3.8% of $70,000 = $2,660. 2

Trusts and estates

Thresholds are very low; undistributed NII above the annual AGI level triggers NIIT. Returns use Form 8960 with fiduciary‑specific lines for income, deductions, and distribution deductions. 6 7

Planning levers for high‑income clients

Manage the “lesser of” rule

Reduce MAGI below thresholds via timing of income and deductions, retirement plan deferrals, Roth conversion pacing, charitable contribution timing, and realizing capital losses. This can reduce the “excess over threshold” leg of the NIIT. 1

Optimize NIIT‑allocable deductions

Trace and allocate state income taxes and investment interest to investment income using reasonable methods; observe section 67/68 limitations where applicable in determining the portion that is “properly allocable” to NII. 5

Active vs passive status

Convert passive activities to non‑passive through material participation to remove trade/business income from NII; note that material participation for trusts/estates is complex and subject to separate section 469 guidance projects. 4

Capital gain management

Harvest losses against gains; defer large asset sales to lower‑MAGI years; consider installment sales to spread gains; evaluate qualified small business stock exclusion or other gain exclusions when available under separate rules. NIIT applies to net gains included in taxable income. 4

Foreign inclusions and distributions

Special coordination rules apply to CFC/PFIC inclusions and subsequent distributions with respect to dividends in the NIIT base; elections under the NIIT regulations can affect whether distributions are treated as NII. 8

Special trust and estate considerations

Distribution deduction and carryovers

Distributions can carry out NII to beneficiaries; beneficiaries include that income in their own NII, and the trust reduces undistributed NII accordingly. Terminating trusts pass through excess capital losses, NOLs, and excess section 1411(c)(1)(B) deductions under section 642(h) concepts for NIIT purposes. 9

Return mechanics

Fiduciary Form 8960 uses specific lines for investment income, allocable deductions, distribution deduction, and calculates NIIT; ensure accurate tracing and allocation to maximize deductions and correct DNI/UNI interplay. 7

Practical checklist for high‑income clients

Confirm filing status and threshold; compute MAGI and NII independently to apply the “lesser of” test. 1
Inventory investment income streams and identify passive vs active; document material participation where applicable. 4
Trace and substantiate allocable deductions (investment interest, advisory fees, allocable state income tax), applying section 67/68 rules as needed for what is allowable against NII. 5
Model timing of large gains, Roth conversions, and distributions to smooth MAGI and NII exposure across years. 1
For trusts/estates, coordinate DNI distributions and year‑end planning to minimize undistributed NII and leverage carryovers/642(h) on termination. 9

If you share filing status, projected MAGI, and your main investment income and deductions, I can run a pro forma NIIT computation and identify targeted planning moves for this year.

Sources

1 – Treasury Regulation 1.1411-2 📄 Summarize
2 – IRS IRM 21.8.1 IMF International Adjustments 📄 Summarize
3 – IRC § 1411(a) 📄 Summarize
4 – T.D. 9644 📄 Summarize
5 – Treasury Regulation 1.1411-4 📄 Summarize
6 – IRS IRM 4.119.4 BMF Underreporter (BUR) Program 📄 Summarize
7 – IRS IRM 3.24.14 Fiduciary Income Tax Returns 📄 Summarize
8 – Treasury Regulation 1.1411-10 📄 Summarize
9 – Treasury Regulation 1.1411-4 📄 Summarize

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Net investment income tax calculations for high-income clients