Don't overpay: mastering net investment income tax for your clients

You need to understand what the net investment income tax is so when Form 8960 is generated, you can spot errors. There are several instances where the software will classify the income as NII when it should not be.

You need to know the ins and outs of this tax implication for your clients’ sake and their wallets.

Below, you’ll find a few of the top questions from a recent webinar on the topic and their accompanying answers. If you choose to attend the on-demand version of this webinar, you’ll have access to the full recording and the entire list of Q&As.   

Q: A client received stock options for a $75,000 gain. Are the gains included in net investment income (NII)?

A: It depends on the type of stock option. Income from the exercise of an incentive stock option (ISO) is not generally subject to regular income tax, although the alternative minimum tax (AMT) may apply. Therefore, income from the exercise of an ISO is not included in NII.

Q: What adjustments are made to adjusted gross income (AGI) to arrive at modified adjusted gross income (MAGI)?

A: For net investment income tax (NIIT) purposes, it is AGI increased by any foreign earned income exclusion (FEIE) less any deductions related to the FEIE.

Q: What is the working capital of a nonpassive business?

A: This generally refers to capital set aside for use in, and the future needs of, a trade or business.

Q: Would a capital gain from cutting timber be subject to NIIT?

A: In general, gains from property sales are subject to NIIT unless the property is used in a taxpayer’s trade or business. If it rises to the level of a trade or business, you have to determine whether the activity is passive. If it is passive, the income would still be subject to NIIT. If it is nonpassive (due to material participation), it isn’t subject to NIIT.

To learn more about preparing taxes for a farmer, you can watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more, join our completely free 30-day trial at go.natptax.com/explore.