6. Can federal income tax credits be used to offset NIIT liability?
Although federal income tax credits can offset any tax liability, the final regulations state that income tax credits are allowed only against regular income tax and may not reduce net investment income tax. Examples of this type of tax credit include the foreign income tax credit and the general business tax credit.
The denial of tax credits as an offset of the NIIT is reflected by the sequence of reporting tax and tax credits on Form 1040. To this point, regular income tax is reported on line 46 of Form 1040. All tax credits reducing that regular income tax are taken lines 47-53. Beginning on line 56, “other taxes,” including the NIIT (reported on line 60), are reported. So logistically, all tax credits that reduce regular income tax are taken before the entry for the NIIT.
7. What form is used to report NIIT?
Net investment income tax is reported on line 60 of Form 1040. On Form 8960 (attached to Form 1040), the taxpayer computes the tax. In addition to reporting all the taxpayer’s net investment income, amounts reported on Form 8814 (Parents’ Election to Report Child’s Interest and Dividends) are also included.
Similar to regular income tax or self-employment tax, individuals who expect to be liable for the NIIT may either make estimated tax payments or request that their employer withhold additional amounts to avoid being subject to penalties for underpayment of taxes.
8. What is the additional Medicare tax? Who is liable for paying it?
The additional Medicare tax is a tax of 0.9% that is tacked on to the “regular” Medicare tax on all wages and self-employment income (collectively referred to as “earned income”) that exceed applicable threshold amounts. Thus, on earned income in excess of the applicable threshold amount, the total Medicare tax rate is 3.8% (the 2.9% regular Medicare tax rate plus the 0.9% additional Medicare tax rate).
In spite of its name, the tax revenue generated by the additional Medicare tax is not specifically earmarked for the Medicare fund. Similar to the regular Medicare tax, the additional Medicare tax is imposed only on individual taxpayers. Thus, entities such as C corporations, trusts and estates are not subject to the tax.