Net Investment Income Tax (NIIT)

Forum|Forum|3 years ago
June 14, 2022
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I have dividend income from a LLC partnership in which I materially participate. My understanding is that because I materially participate in the LLC I am NOT subject to the 3.8% Net Investment Income Tax (NIIT) on this dividend income (i.e., it is NOT considered passive activity because I materially participate). However, TurboTax Deluxe 2021 appears to be including the income and calculating my NIIT accordingly. I can see where the electronic K-1 form in TurboTax has the "material participant" box checked, but it only appears to apply to ordinary business income ($0, in my case), not the dividend income. How do I get TurboTax to recognize the dividend income is NOT taxable because I materially participate in the LLC that issued my K-1?

Mike9241

don't know if this applies to you but there is a special rule for traders in financial instruments. income including interest, dividends, and capital gains from the trade or business of trading financial instruments such as stocks, bonds, options, forward or futures contracts or commodities is included in NII regardless of whether the business is a passive activity Reg 1.411-5(a)(2). the determination of this is made at the entity level.

(1) Definition of financial instruments. For purposes of section 1411 and the regulations thereunder, the term financial instruments includes stocks and other equity interests, evidences of indebtedness, options, forward or futures contracts, notional principal contracts, any other derivatives, or any evidence of an interest in any of the items described in this paragraph (c)(1). An evidence of an interest in any of the items described in this paragraph (c)(1) includes, but is not limited to, short positions or partial units in any of the items described in this paragraph (c)(1).

(2) Definition of commodities. For purposes of section 1411 and the regulations thereunder, the term commodities refers to items described in section 475(e)(2).

if this is not your situation and your dividends are exempt from the NIIT the adjustment is made through the 8960 on line 7

Showtime1Author

Thanks for this! The situation does not apply per se but the instructions regarding how to make the adjustment (line 7 on form 8960) were very helpful.

Anonymous_

Employee

The dividend income that is reported on Line 6a of your K-1 is most likely subject to the NIIT. For that purpose, it is largely irrelevant that you materially participate in the business of the multi-member LLC (except income received in the ordinary course of the LLC's business is obviously not subject to the NIIT).

Also, Form 8960 is only filed by individual taxpayers and estates/trusts.

Showtime1Author

I'm clinging to your words "most likely" in hopes there's a chance I can still avoid the NIIT. I mean, you didn't say "definitely" 🙂

Seriously, is it your understanding that dividend income is not subjected to the same "material participation" tests as ordinary income? Therefore, I'll owe the NIIT?

Anonymous_

Employee

@Showtime1 wrote:
Seriously, is it your understanding that dividend income is not subjected to the same "material participation" tests as ordinary income? Therefore, I'll owe the NIIT?

In the vast majority of cases, dividend income would be considered investment income for the purposes of the NIIT as it is not typically derived in the ordinary course of the partnership's business.