Hi, is it true that you must itemize in order to get a credit for State, Local, and Foreign tax (Line 9B) when filling out form 8960? I am not itemizing this year and that figure is blank for me currently and doesn't seem editable, though in previous years I did have figure there. Is there any way to enter the figure directly?
The only time you would receive a credit is for State, Local, and Foreign taxes you paid for the tax year that are attributable to net investment income. This has nothing to do with your own local and foreign taxes on your own personal property. Only what you paid for regarding your investment income. Please read this IRS link, for more detail.
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.
Yes, you can only use the State, Local and foreign income taxes on Form 8960 if you itemize deductions on for regular tax. If you want to switch to itemized deductions, please see the following instructions: You should enter all your income and deductions before switching.
From the left-hand menu, select Federal (on mobile devices, you might need to scroll down).
Now select Deductions & Credits near the top of your screen.
Scroll all the way down to the to the bottom of the screen and Click on Wrap up tax breaks (if you don't see this button, select Skip to see all tax breaks, then scroll down again).
Continue through the interview until you see The Standard [or Itemized] Deduction is Right for You,
On that screen, check the box Change my deduction to see the dollar amount for each deduction.
Select Continue if you want to save any changes.
I was in this EXACT situation last year. I chose the lower itemized deduction because in the end I paid fewer taxes. I was told if you have an AMT it can often be advantageous to choose to itemize.
This year, however, due to a change in circumstance, it is more advantageous for me to choose the Standard Deduction. I would still like to be able to take the 9b deduction. I have spent hours researching this since a CPA who does taxes for a living told me I can, but I can't seem to find anything to definitively back him up.
If anyone can tell me it is ok to take 9b if selecting the Standard Deduction, I would be forever greatful.
It depends. I had this same question previously and I couldn't find anything definitive that stated this can be claimed by a taxpayer who claims the standard deduction. Please read my response in this link.
I have been told by the CPA I used for taxes last year that I can use 9b even if I take the standard deduction. I also read in a reddit forum that tax law allows it, but Turbo Tax does not (unless you manually adjust the number - if you have the downloaded version - which I don't). So, sounds like Turbo Tax just doesn't want to deal with it.
I have the same issue. I looked back at the past couple of years and it left that line blank there as well. This is making my tax due too much.
Is there really no solution? I have the online version
No solution with on-line version. Must download Turbo Tax to your computer (if your computer is new enough to be updated to the version TT requires to even download it) and go to Forms Mode to manually enter the number on 9b and then Turbo Tax won't let you e-file. You must mail in your return. I did this all last year and still have NOT received my 2020 Tax Refund.
It's not 100% clear, but by my reading of Internal Revenue Code section 1411(c)(1)(B), I don't think this would be allowed. Net investment income is reduced by "the deductions allowed by this subtitle which are properly allocable to such gross income or net gain." I would think an itemized deduction is not "allowed by this subtitle" to a person who does not itemize. (Oddly, the Treasury Regulations don't seem to address this. It would be in Reg. 1.1441-4 if anywhere; there are extensive rules on how to apply now-defunct itemized deduction limitations but nothing on people who don't itemize.)
Maybe you can take a position that it's deductible (allocable state taxes are more generally "allowed" even if not specifically to you), but don't be surprised if the IRS disagrees, and prevails. And as noted above, if you override you can't e-file.