IRS Releases Draft Form 8960, But Is It Clear?

IRS Releases Draft Form 8960, But Is It Clear?

The Internal Revenue Service has just-released 2013 draft Form 8960. As so succinctly stated by Ted Batson, executive vice president at Renaissance Administration LLC., to Bloomberg News on Aug. 7th, he summarized 8960 as the form which:

… beneficiaries of charitable remainder trusts and others will use 8960 to compute the new 3.8 percent surtax on net investment income. This form accounts for the fact that not all items reported on a beneficiary’s Schedule K-1 meet the definition of net investment income subject to the tax.

Draft Form 8960—Net Investment Income Tax

The IRS has released draft Form 8960, Net Investment Income Tax—Individuals, Estate, and Trusts. They do so in advance of finalizing the regulations for those individuals who might be subject to the surtax in 2013. And, instructions for Form 8960 also have yet to be released. But as reported by Federal Tax Weekly, Anthony Nitti, CPA/Partner, at Withum Smith + Brown, PC, explains to, the takeaway from the IRS draft is nebulous at best:

Ultimately, the draft form does nothing to address taxpayers’ biggest concern about the proposed regulations—how one is to determine whether their activity rises to the level of a ‘trade or business,’ a prerequisite for exclusion from net investment income. 

Nitti points to those who receive income from rental real estate, specifically. The question lingers or is not clearly defined by the IRS as to whether certain types of rental activity are indeed defined by the government as a trade or business activity. Nitti declares that the IRS will have to—whether in the instruction release or in the final regulations—address this pressing concern. But for now, taxpayers have only draft form 8960 to contend with. It is one page, sectioned into three parts which include:

      • Part I – Investment Income
      • Part II – Investment Expenses Allocable to Investment Income and Modifications
      • Part III – Tax Computation (separate computations are required for Individuals and Estates and Trusts)

The Surtax

The 3.8 percent surtax on monies which are deemed net investment income under the new Code Section 1411 applies to tax years after December 31, 2012. Not atypical of most tax laws, many taxpayers are still confused about the complicated formula and/or definition for determining tax liability for the surtax because regulations published initially on December 5, 2012 are not clear or adequate balk outspoken critics of this tax. While the IRS promises to issue the new regulations well before 2014 tax filing season to give people ample prep time, the notorious agency has not been so compliant with their own published deadlines of late. Note the comments by CCH on their site regarding these deadlines:

Despite publication of the Notice and Request for Comments on Form 8960 in the July 29, Federal Register, the IRS did not make draft Form 8960 itself available until August 8. At the time of the Notice, an IRS spokesperson told CCH that the draft form had to undergo some “final adjustments” before being released.

Reliance on Instructions

While the one page form does allow for flow through computations from other forms—the preliminary work in determining net investment income done on other forms before arriving at the NII Tax Form 8960, draft Form 8960—it only contains 15 lines which reference instructions. Some lines are straight-forward, a quick reference to a chart will suffice. Yet even though this is a one-page document, some lines are still very complicated and will likely require a separate worksheet. The calculations behind Line 9c for example may require extra computational work or if you are extra frustrated, it might have you running to a CPA:

Miscellaneous investment expenses (see instructions)”may require more complex directions or worksheets, given the issues that have surfaced surrounding them since proposed regulations were issued.

When It’s Time to Seek Professional Help

If you are like most taxpayers, the weight of filling out these forms on your own with the risk of potential error and/or tax penalties looming, can be overwhelming. If you fall into this category—you’re not entirely sure if your net investment income qualifies as trade or business activity— or if you’re simply at the pulling-out-my-hair stage, it may be time to consult a professional.

For this and all your other tax accounting needs call Joel Lewinson today at 818-593-6777 or visit my website for more tools and information.

photo by:

Dave Dugdale