I feel Turbotax is incorrectly calculating Form 8960, line 9b.
My problem is that turbotax is multiplying my entire state tax amount (instead of the $10,000 actual Schedule A state tax deduction) by the ratio of investment income to adjusted gross income.
The instructions to form 8960, page 12 (shown below) say you can allocate state, local, and foreign income taxes if properly deducted on your income tax return.
We pay California state income tax on our investment income, so our state income taxes are allocable to our investment income. However, our state income tax deduction is limited to $10,000. Only the $10,000 should be allocated to investment income.
Part II is used to report deductions
that are, predominately, itemized
deductions. For more information on what
constitutes properly allocable deductions,
see Regulations sections 1.1411-4(f)–(g).
Reasonable method allocations. To
the extent that you have a properly
allocable deduction that’s allocable to both
net investment income and excluded
income, you may use any reasonable
method to determine that portion of the
deduction that’s properly allocable to net
investment income. The three items that
may be allocated between net investment
income and excluded income are the
following.
• State, local, and foreign income taxes if
properly deducted on your return when
calculating your U.S. regular income tax.
