How is Form 8960 line 9b calculated by TurboTax?

[cooterp14]

Turbotax is not calculating Form 8960 line 9b correctly.  It is picking up schedule A tax deduction which is most likely  not attributable to net investment income

[harterpk]

Turbotax is probably doing the right thing for you.   It should deduct the proportion of state tax that decreases investment income, which is based on the ratio of your gross income and investment income.  It doesn't seem to do the right thing if you take the standard deduction.

[rick4608]

I would like to get an official answer from Intuit Turbo Tax on this question.  I believe the above answer is correct and Turbo Tax has a error in it.

[harterpk]

I, too, would like to get an official response from TurboTax on the computation of net investment income when using the standard deduction.

Schedule A is effectively used to deduct from earned income, since qualified investment income (most of my investment income is qualified) is treated separately under capital gains rates.  There's no reason the use of itemization should be linked to calculation of net investment income.

[janranjen]

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.

[jizhiqiang1]

Turbotax is incorrectly calculating Form 8960, line 9b.

[cooterp14]

Try updating turbotax.  It was doing the same thing for me until I updated.

[bhf930]

i have the same issue; has anyone gotten further information on this issue?

[clayTTax]

Please, please, please -- would somebody, preferably from Turbo Tax, provide a clear explanation, with references to the applicable tax law, as to why the $10,000 SALT cap for Schedule A should apply to the state and local income tax deduction for NIIT on Form 8960 Line 9b?  I find no clear statement in the IRS instructions that it should.  

If the government intends this to be the case with Form 8960, Line 9b, as they clearly do with Schedule A, Line 5e, they should clearly state this on Form 8960, Line 9b.  Without such clear instruction, I believe the entry on 8960-Line 9b should come from Schedule A, Line 5a, not Schedule A, Line 5e, but Turbo Tax bases this on Line 5a. 

A related question is why there is no SALT deduction allowed if you do not itemize on Schedule A?  It is possible that SALT exceeds $10,000 but Schedule A does not exceed the standard deduction.

This NIIT is for net investment income, not gross investment income, the key word being "net".   State and local taxes paid reduce the gross investment income to net.  Also, by capping this NIIT deduction at $10,000, the NIIT is effectively taxing a paid state and local tax, i.e. double taxation while taxing a portion of the gross investment income, not the net investment income.

[ThomasM125]

I can't site you the IRS regulation, but it is my understanding that the state tax deduction is limited to $10,000 for the NIIT. That is also the position of TurboTax. The form instructions provided by the IRS are only a summary of the full regulations, which are often subject to interpretation.

You do have the option to override the entry in the desktop version of TurboTax if your research indicates that you can deduct the full amount of state taxes. However, that would invalidate your Turbotax's accuracy guarantee.

[clayTTax]

Thank you ThomasM125 for your prompt reply.  

I understand what you are saying but the issue I am having is just that, nobody seems able to cite the regulation that backs up the understanding and Turbo Tax position that NIIT is subject to the SALT cap, and it is subject to interpretation.  If this understanding is correct, then it is costing Turbo Tax users a bit of coin.

I have the Premiere desk top version and was unable to find this in the Forms to revise it.  I will check again.

Thanks again,

Clay

[ThomasM125]

I understand your frustration. However, the limit imposed on the state tax deduction is a relatively new regulation, and often new regulations don't cover all possible scenarios. Sometimes it takes a court case to clear up ambiquities.   

[clayTTax]

Thanks again Thomas.

Yes, agreed, a relatively new regulation.  But the solution is relatively easy.  If Turbo Tax is the correct way, the 8960 form should have the SALT deduction specifically stated on or near Line 9b.   If not, the 8960 instructions should address this point.

I may try a different tact.  File 8960 now according to Turbo Tax since I am unable to override this in the software.   Then, perhaps this fall, file an amended return outside of Turbo Tax.  Meantime, I will give this tact additional thought and continue to research this.

[64dancer]

Line 9b IS limited to the $10,000. However, do not use the 10,000 in the formula when calculating what 9b would be if there were no limit. In other words:

Form 8960, Line 8 / AGI x SCH A*, Line 5 = Line 9b. If this 9b is over 10,000, you have to put 10,000 on Line 9b. I used TaxAct last year and it did not put the 10,000, so I had to manually over-ride it.

You may also use Line 9b even if you take the Standard Deduction. I have spoken with a CPA (who does taxes) and a second Tax Expert who both say you can do this. I have also read a reddit forum that states this as true. The person from the forum believes the Tax Law allows it, the IRS instructions do not. You need to go to Forms (if you have the downloaded version) and manually over-ride it. 

* My question is, in the formula above, where it says to use SCH A, I'm not sure you really can. Can you include the portion of taxes paid in 2020 for 2019? I have read varying opinions.