I filed an amended tax return for 2020. The IRS adjusted my amended tax return and only returned to me about 80% of the refund TurboTax had calculated. I believe the discrepancy is on form 8960. I have an investment interest expense and TurboTax used entered this for deduction on form 8960 line 9a and also on form 4952 line 8. It appears the IRS credited me the deduction for the investment interest expense from form 4952 but did not credit me the smaller deduction for the same interest expense on form 8960. In other words, I was able to reduce my investment income by the amount of my investment interest expense so I did not have to pay income taxes on that amount, but I still had to pay the net investment income on that amount…which seems odd to me. The income is offset with an expense, but I still have to pay net investment income tax on it.
Reviewing the IRS website instructions for form 8960 it does state “If Form 4952 includes investment interest expense that’s deducted on Schedule E (Form 1040) and already taken into account on line 4a, don’t include the same amount on line 9a.”
So why did TurboTax enter it on both forms? Is this an error in TurboTax’s programing? Or am I entitled to take the deduction on both? Did I inter something incorrectly?
UPDATE: I completely missed the fact that I don't have a schedule E. My investment interest expense appears on schedule A. All my investment income is passive. Now I'm not sure why the IRS disallowed my interest expense deduction from form 8960 since their instructions do permit it.
what is the nature of the investment interest - attributable to royalties, passive activity, nonpassive trade or business or investments? where did the investment interest get deducted? - schedule A, C, E, F.
it's possible that the investment interest ended up being allocated to more than one schedule. we can't see your tax return.
from 4952 instructions
Part III—Investment Interest Expense Deduction
Individuals. Generally, enter the amount from line 8 on Schedule A even if all or part of it is attributable to a partnership or an S corporation. However, if any part of the interest expense is attributable to royalties, enter that part on Schedule E page 1. Also, if any part of the interest is attributable to a trade or business that isn’t a passive activity, enter that part on the schedule where you report other expenses for that trade or business.
Thank you for your reply.
The investment interest is all passive investment income (dividends, coupons, etc.).
The investment interest was deducted on 1040 schedule A line 9.
The IRS instructions for form 8960 (net investment income tax) do state “If Form 4952 includes investment interest expense that’s deducted on Schedule E (Form 1040) and already taken into account on line 4a, don’t include the same amount on line 9a.” but that sounds so unintuitive because it's like the IRS is saying "you can deducted your interest expense from your investment income (form 4952) because you only pay income taxes on the amount that is profit, but you still have to pay the 3.8% net investment income tax (form 8960) on the full amount of investment income you received regardless of expenses incurred to produce it." From an accounting perspective it seems odd to be paying taxes on amounts that are not profit.
UPDATE: Reading that closer. The IRS instructions say to exclude it if it was included on Schedule E...which I did not have. So now I'm not sure why the IRS rejected by inclusion of the investment interest expense on form 8960. Back to square one.
Still have questions?Make a post