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Form 8960, Line 9b – Which Value Do You Use in the Formula?

Forum|Forum|1 year ago
February 28, 2025
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Line 9b asks: How much of your state+local+foreign income tax is due to your investment income?

(I'm going to assume no foreign tax for this question.)

It would make sense that the value would be calculated using the ratio of your total investment income: (Form 8960, Line 8 ) divided by your AGI (1040 Line 11). You then simply multiply your state+local taxes by this ratio.

Form 8960, Line 9b =

(Investment income; Form 8960, Line 8 ) / (AGI; 1040 Line 11) x (State+Local Taxes; Schedule A, Line 5)

But...

• Schedule A Line 5a is the state taxes you ACTUALLY PAID

• Schedule A Line 5e is the maximum DEDUCTION you can take ($10,000)

So in the above formula, do you use 5a or 5e to computing your investment income tax?

TT uses 5a, while other software I'm comparing uses 5e.

Which is correct, and why?

Best answer by PhoBug

https://www.irs.gov/instructions/i8960 says:

Line 9b—State, Local, and Foreign Income Tax
Include state, local, and foreign income taxes you paid for the tax year that are attributable to net investment income. Form 1040-NR filers include only taxes paid for the U.S. residency period of the tax year. Sales taxes aren’t deductible in computing net investment income. You may not take a deduction for any foreign income taxes paid for the tax year if you took a credit for any portion of them. See section 275(a)(4).

You can determine the portion of your state, local, and foreign income taxes allocable to net investment income using any reasonable method. See Reasonable method allocations, earlier, and Deductions subject to AGI limitations under section 67 or section 68, later.

P

PhoBugAuthorAnswer

https://www.irs.gov/instructions/i8960 says:

Line 9b—State, Local, and Foreign Income Tax
Include state, local, and foreign income taxes you paid for the tax year that are attributable to net investment income. Form 1040-NR filers include only taxes paid for the U.S. residency period of the tax year. Sales taxes aren’t deductible in computing net investment income. You may not take a deduction for any foreign income taxes paid for the tax year if you took a credit for any portion of them. See section 275(a)(4).

You can determine the portion of your state, local, and foreign income taxes allocable to net investment income using any reasonable method. See Reasonable method allocations, earlier, and Deductions subject to AGI limitations under section 67 or section 68, later.