This article first reviews the fundamentals of the net investment income tax and Form 8960. The anomaly effectively penalizes the taxpayer for allocating part of its portfolio to tax- exempt income- generating assets, which is probably not what Congress intended when it enacted the net investment income tax. A large number of computations in Form 8960, such as for modified adjusted gross income (MAGI), deductions properly allocable to individual taxpayers' income, undistributed net investment income, adjusted gross income (AGI), and deductions properly allocable to trust income contribute to this perhaps unintended result. With implementation of the tax in its infancy, an unintended anomaly in the calculations on Form 8960 may have slipped through the cracks. To report the net investment income tax due, the taxpayer must file Form 8960, Net Investment Income Tax-Individuals, Estates, and Trusts, beginning with the 2013 tax year. The Patient Protection and Affordable Care Act, 1 as amended by the Health Care and Education Reconciliation Act, 2 sought to ensure that all Americans have access to quality, affordable health care and was funded in part by a 3.8% tax on the net investment income of individuals, trusts, and estates. Although the net investment income tax should not apply to tax-exempt income, the difference in the treatment of certain expenses on Form 8960 from their treatment on Form 1040 or 1041 may lead to the practical result that a taxpayer with both types of income will be subject to the net investment income tax on a portion of the tax-exempt income.If a taxpayer has both income that is subject to the tax and exempt income, the taxpayer's expenses must be allocated between the two types of income in calculating the tax.The calculation of the tax for individuals differs from its calculation for trusts and estates. The 3.8% net investment income tax applies to individual taxpayers whose net investment income exceeds certain amounts.Worksheet for Figuring the Limit on Rental Deductions for a Dwelling Unit Used as a Home. The statement that is prepared to support the rental deductions can be found in Publication 527, page 20, and is labeled "Worksheet 5-1. The carryover is split between depreciation and operating expenses. Excess mortgage interest entered on Income > Rent and Royalty worksheet > Section 5 - Rental of Vacation Home > Excess vacation mortgage interest.Īny expense not deducted this year is carried over to next year. These include all the other rental expenses entered on Income > Rent and Royalty worksheet > Section 2 - Expenses such as auto and travel, cleaning and maintenance, insurance, legal and professional fees, repairs, utilities, amortization of bond premiums, points and any expense entered as "Other Expense" in line 24 (with the "direct expense" checkbox blank). The rental portion of the following expenses is deductible only up to the amount of rental income remaining after subtracting the fully deductible expenses listed above: These include advertising, commissions, management fees, other interest, supplies and bad debts. Real estate taxes entered on Income > Rent and Royalty worksheet > Section 5 - Rental of Vacation Home > line 8 - Vacation home Real estate taxes.Home mortgage interest entered on Income > Rent and Royalty worksheet > Section 5 - Rental of Vacation Home > line 7 - Qualified vacation home mortgage interest.The rental portion of the following expenses is fully deductible on Schedule E for vacation homes:
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