Net Investment Income Tax Information (Form 8960) - What is Allocable to Investment Income?
This is my first time having to complete the Net Investment Income Tax Information (Form 8960) because of capital gains on an investment.
FreeTaxUSA automatically put in the dollar values in the section I copied and pasted below. Where did FreeTaxUSA get those dollar amounts? Can you explain how they come up with those dollar amounts? I want to make sure they are correct.
Deductions and Additional Modifications Allocable to Investment Income
Enter any of these itemized deductions on your federal Schedule A that are allocable to investment income. Any reasonable method can be used to allocate how much of your itemized deductions relate to your investment income.
You've entered $10,000 of allowable state income tax.
Enter any state income tax paid in 2024 that is allocable to net investment income: $2,118
One way of allocating state taxes is to do a ratio of your investment income to your total income. If you use this method, you could allocate $2,118 to your investment income.
Answers
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Please contact Support from within your account to ask them to explain the values and calculations for Form 8960. They will be able to review your return and privately discuss specific amounts on your return with you.
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Once you determine the ratio, do you multiple the ratio by your entire state tax amount?
isn’t that amount already deducted from your income if you itemized? Or is it only the amount that is above the SALT cap that you can then allocate to investment expense because you couldn’t already deduct it?0 -
Hello Taxist,
Yes, that amount is already deducted from your taxable income when you itemize your deductions. However, the Net Investment Income Tax (NIIT) is another tax on top of your normal income tax, so some deductions that were claimed as itemized deductions can also be used to reduce the NIIT.
Once you determine the ratio, you would multiply that by the State and Local Income Tax (SALT) that was included as an itemized deduction on your tax return, which is capped at the $10,000 limit. So, if you were only able to claim $10,000 for your SALT taxes as an itemized deduction, then you would multiply $10,000 by that ratio.
This is because, according to IRS instructions for Form 8960, the following "may be allocated between net investment income and excluded income…State, local, and foreign income taxes if properly deducted on your return when calculating your U.S. regular income tax."
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Following up question for 2026: since the SALT cap has been raised to $40k, if my state income tax is $60k, and my SALT deduction on Schedule A is phased out to 15K, on my form 8960 line 9b calculation for the state income tax allocable, should I use 15K, 40k or 60K? Currently the FreetaxUSA website is suggesting 15K, but when I run the same return on TurboTax, their calculation suggests taking the 60K. Appreciate any suggestion on if the calculation is subject to SALT phase out.
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Hi barbel,
The instructions for form 8960, line 9b, states, "See the Instructions for Schedule A (Form 1040) for information and potential limits to state and local income taxes. (Total taxes may be limited under section 164(b)(6) if the expense is not associated with a trade or business or with a section 212 activity for the production of income.)"
For details:
So, it is reasonable that the State, Local, and Foreign Income Tax amount for line 9b, Form 8960 is limited when the amount for Schedule A is limited.
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