Okay. So if I do have taxes paid for the prior tax year which is attributable to net investment income (as captured on Form 8960 line 8 (sum of interest, dividends, and net gain from sale of investments), can I enter a non-zero number on Form 8960 line 9b if I am taking the standard deduction?
The instructions for 8960 you linked do not mention a standard deduction preventing entering a value on this line. However, the Reasonable Method Allocations section perhaps indicates this in a slightly roundabout way. It states that "State, local, and foreign income taxes if properly deducted on your return when calculating your U.S. regular income tax." can be allocated to net investment income. So I am interpreting that this means that since I am taking a standard deduction and not an itemized deduction, that I am not deducting these state taxes against my U.S. regular income tax and therefore cannot use them to reduce my NII tax. Is that your interpretation?
I also happen to be in an unusual edge case myself where TurboTax recommends the standard deduction as being better for me personally but in fact, I pay about $70 more with this option. This appears to be because the selection of the better option between standard and itemized does not seem to take this line 9b difference into effect. So even though I am taking an itemized deduction of less than the standard, it is more than made up for by the 9b deduction.
Ideally, I would like to take the larger standard deduction and get to enter a non-zero value for 9b but it seems that this is not allowed. Correct?
For TurboTax, I doubt this impacts too many people, but it appears that the calculation of whether to take the standard or itemized deduction is not optimal as it is not taking this impact into account. It is looking at maximizing the size of the exemption and not minimizing the total taxes paid.
