Form 8960 line 9b is calcing state income tax paid as % income from investments * state tax withheld. Not state tax due. This is wrong if too much/little was withheld.

[RaifH]

You can only deduct the taxes paid on the income in 2021. Using the portion of income derived from investment multiplied by the total state tax paid in 2021 is a method the IRS considers reasonable. If you owed taxes after filing 2020 taxes, you can enter the amount of state tax paid in 2021. To do this:

1. Click Start/Revisit in the Federal > Deductions & Credits > Estimates and Other Taxes Paid > Income Taxes Paid section of your return.
2. Enter the amount you paid on your 2020 return in the Other Income Taxes Paid in 2021 > Balance due on your 2020 state taxes paid in 2021

[natenate]

In my case 2021 state taxes withheld were a lot more than 2021 total state tax.  For example purposes lets say I paid 25k in state tax, I only owed 15k and so I will be getting a refund of 10k. 

Turbo tax is taking the 25k * % of income from investments.  I would have thought that it should be taking the 15k * % of income from investments.

I guess you are saying that next year the 10k refund will end up reducing the amount on line 9b for my 2022 taxes?

[DMarkM1]

Possibly.  The amount on line 9b of the form 8960 is limited to 10,000.  The calculation for that line 9b is on the Form 8960 worksheet. 

The ratio of your investment income to your adjusted gross income is used to figure the amount/percent of state/local income taxes reported on your schedule A that is allocable to investment income. 

Next year the taxable portion, if any, of your state tax refund will be part of your adjusted gross income and thus part of the ratio to figure next year's line 9b if applicable.

[janashces]

Hi RaifH, Would you explain one more time with an example as how deduction amount in 9b of form 8960 is calculated? 

[janashces]

If my line 8 on 8960 is 25,000 and my AGI was 220,000 and my itemized deduction of SALT is limited to 10,000 in federal itemized,  but my State taxes are really 20,000. Is the deduction:

1. (25000/220000)*10,000

OR

2.(25,000/220,000)*20,000 ?

Two softwares are doing differently . Turbo is doing 2 above. Wondering which is right per IRS. 

[RobertB4444]

It should take into account the entire amount of the tax paid, not the entire amount that is deductible.  So number 2 is correct according to IRS instructions.

@janashces 

[janashces]

Thanks Robert!