8652 / Can federal income tax credits be used to offset net investment income tax liability?

Although federal income tax credits set forth in Subtitle A of the IRC can offset any tax liability, the final regulations state that income tax credits are allowed only against regular income tax (Chapter 1 of Subtitle A) and may not reduce net investment income tax.¹ Examples of this type of tax credit include the foreign income tax credit and the general business tax credit.²The denial of tax credits as an offset of the net investment income tax 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 net investment income tax (reported on line 60), are reported. So logistically, all tax credits that reduce regular income tax are taken before the entry for the net investment income tax. Moreover, none of those credits are refundable credits (meaning the credits can only reduce the regular tax to zero and not generate a refundable overpayment). Thus, they are of no consequence with regard to the net investment income tax reported on line 60.

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1.Treas. Reg. § 1.1411-1(e).

2.See IRC §§ 27, 901, 38.