Form 8960 Line 9b deduction base — is FTU applying the full allowable amount?

taxpro
taxpro Member Posts: 1 Newcomer
edited April 2 in General

For Form 8960 (Net Investment Income Tax), Line 9b allows a deduction for taxes properly allocable to net investment income. According to IRS Reg. §1.1411-4(f)(3) and the Form 8960 instructions, the deduction base is not subject to the $10,000 SALT cap used on Schedule A.

Instead, the IRS allows the full amount of deductible state, local, and foreign income taxes (such as W-2 Box 17 withholding and estimated payments) to be proportionally allocated based on the ratio of investment income to AGI.

It appears FreeTaxUSA limits the deduction base to $10,000, which reduces the Line 9b deduction and increases NIIT owed — even when more taxes were actually paid. Can anyone confirm whether this cap is intentionally applied, and if there's a way to override it to reflect the full allowable deduction?

Thanks in advance!

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  • rachels
    rachels FreeTaxUSA Agent Posts: 109

    Hi taxpro,

    If you are subject to the Net Investment Income Tax (NIIT), you will enter this information in your account by going to Misc > Net Investment Income Tax (Form 8962).

    You are correct that the amount entered in the "Enter any state income tax paid in 2024 that is allocable to net investment income" field is limited to $10,000 as the maximum entry. This is intentional and correct.

    IRS Form 8962 instructions for line 9b include the following statement: "The overall limitation on itemized deductions is also suspended for tax years 2018 through 2025. The overall limitation on itemized deductions under section 68 doesn’t apply for tax years beginning after 2017 and before 2026. See section 68(f)."

    This is referring to the overall limitation on itemized deductions (ie. your itemized deductions as a whole may be limited if your income is too high) being suspended, not to the State and Local Income Tax (SALT) cap for itemized deductions. The SALT cap still applies to the NIIT.

    For related information, please see this Community discussion.

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