Form 8960 (Net Investment Income Tax)

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
User avatar
Topic Author
dcnut
Posts: 271
Joined: Fri Mar 02, 2007 12:00 pm
Location: Illinois

Form 8960 (Net Investment Income Tax)

Post by dcnut »

I had a large capital gain in 2013 due to sale of farmland, so I know that we are subject to the new NII tax on form 8960.
The IRS has not yet released the final instructions for this form, but a draft version is available on-line (http://www.irs.gov/pub/irs-dft/i8960--dft.pdf).

State income taxes attributable to NII are deducted on line 9b. The instructions say:
"Include on line 9b any state or local income taxes, or foreign income taxes you paid which are attributable to net investment income. This may be all or part of the amount you reported on Schedule A (Form 1040), line 5a (or Form 1041, line 11). For purposes of line 9b, sales taxes are not deductible in computing net investment income."

My problem is that the income taxes deducted on Schedule A were based on my income earned in 2012, which included much less investment income than 2013. My gut feeling is that I should allocate this state income tax paid in 2013 based on the ratio of 2013 investment income divided by 2013 AGI. My state has a flat tax of 5%. An alternative interpretation, however, would be to allocate the state income tax paid in 2013 based on a ratio of 2012 investment income divided by 2012 AGI.

I can hope that the final version of the 8960 instructions will clarify this issue, but I would not count on it.

Glenn
User avatar
HueyLD
Posts: 9789
Joined: Mon Jan 14, 2008 9:30 am

Re: Form 8960 (Net Investment Income Tax)

Post by HueyLD »

................
Last edited by HueyLD on Sat Feb 07, 2015 7:03 pm, edited 1 time in total.
User avatar
Topic Author
dcnut
Posts: 271
Joined: Fri Mar 02, 2007 12:00 pm
Location: Illinois

Re: Form 8960 (Net Investment Income Tax)

Post by dcnut »

Yes, I will definitely wait until the instructions are finalized, but I am not confident that this issue will be resolved.

Glenn
Calm Man
Posts: 2917
Joined: Wed Sep 19, 2012 9:35 am

Re: Form 8960 (Net Investment Income Tax)

Post by Calm Man »

Glen,
You are probably right that it will never be resolved to the satisfaction of a very careful person. However, I have mine in TurboTax and it is ready to file once the forms are "released" on Feb 13. I will wait awhile.

But I have a feeling it is far more straightforward and it is a simple NII. You take modified AGI (which is almost identical to AGI) and pay tax on the mAGI over 200K for singles or the NII, whichever is less. 250K for married. I think the state thing is not relevant except possibly in rare cases and certainly should not apply to what you are describing from the prior tax year when the Obamacare taxes didn't even exist yet.
learning_head
Posts: 844
Joined: Sat Apr 10, 2010 6:02 pm

Re: Form 8960 (Net Investment Income Tax)

Post by learning_head »

Wonder if anyone has updates on this?

I am confused just as OP about line 9b on 8960. If I am to follow the instructions, it looks like I can deduct

Schedule A line 5 state income tax (which in turn has some payments for 2012 income and other payments are for 2013 income)

and then, to find part that is allocatable to investments, multiply that by 2013 total investment income (from line 8 of 8960) / 2013 AGI.

This mixing and matching does not make much sense - so maybe I am not reading instructions right.

Further, in AMT case, state income taxes on Schedule A are all added back and do not affect AMT tax, but apparently, they still can be used as deduction for this NIIT tax form!

What did others do for this?

3/3/2014 Update: removed "modified" word incorrectly used earlier
Last edited by learning_head on Mon Mar 03, 2014 3:38 pm, edited 1 time in total.
sscritic
Posts: 21853
Joined: Thu Sep 06, 2007 8:36 am

Re: Form 8960 (Net Investment Income Tax)

Post by sscritic »

To the extent that you have a properly allocable deduction that is allocable to both net investment income and excluded income, you may use any reasonable method to determine that portion of the deduction that is properly allocable to net investment income.
...
The 3 items that may be allocated between net investment income and excluded income are:
State, local, and foreign income taxes deducted on Schedule A (Form 1040), line 5 (or Form 1041, line 11),
...
Examples of reasonable methods of allocation include, but are not limited to, an allocation of the deduction based on the ratio of the amount of a taxpayer's gross investment income (Form 8960, line 8) to the amount of the taxpayer's AGI (Form 1040, line 38).
I don't see modified, but your method might be reasonable.
learning_head
Posts: 844
Joined: Sat Apr 10, 2010 6:02 pm

Re: Form 8960 (Net Investment Income Tax)

Post by learning_head »

@sscritic: you are right, thanks for catching - I should not have said "modified 2013 AGI". I remove "modified" word.

It does not change my (and OP's) main question though: why are we combining numbers from line 5 of Schedule A (which is a combination of state tax related payments for 2012/2013 state taxes) with 2013 fraction of investment income. Why do 2012 state taxes have to do with what my 2013 tax years NIIT is?

Further, in AMT case, Schedule A form can have 0 for state tax or something large depending on whether one chooses Itemized or Standard deduction. Decision between Std and Itemized deduction does not affect AMT in 99% of cases - yet it would affect this value dramatically - this is also quite unusual for all the tax forms I've seen.
User avatar
Electron
Posts: 2658
Joined: Sat Mar 10, 2007 7:46 pm

Re: Form 8960 (Net Investment Income Tax)

Post by Electron »

I realize that this thread is from 2014, but it appears that some of the same questions remain for 2018.

In particular, I'm wondering how others are handling the state and local tax deduction on Form 8960 Line 9b. This includes the issue of the Standard Deduction that is now replacing Itemized Deductions for many taxpayers.

The 8960 Instructions state the following:

"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."

The remaining two items include other types of expenses.

"Examples of reasonable methods of allocation include, but aren’t limited to, an allocation of the deduction based on the ratio of the amount of a taxpayer's gross investment income (Form 8960, line 8) to the amount of the taxpayer's AGI."

The Instructions for Line 9b include the following statement:

"Include state, local, and foreign income taxes you paid for the tax year that are attributable to net investment income."
Enjoying the Outdoors
AngryThomas
Posts: 14
Joined: Mon Feb 27, 2017 10:25 pm

Re: Form 8960 (Net Investment Income Tax)

Post by AngryThomas »

I am glad you bumped this because I, and perhaps many others, are newly in this situation. To boil down my/our question for those only scanning the thread:

"Are we allowed to deduct state income tax from Form 8960 investment income if we are not itemizing deductions?"

On the bright side, I had only ~$3k of realized invinc and live in a state with 3% income tax... so I could reduce about only about $100 of expense... which saves me about $3 of federal tax. I am curious out of principal, however, what is permitted!
User avatar
Electron
Posts: 2658
Joined: Sat Mar 10, 2007 7:46 pm

Re: Form 8960 (Net Investment Income Tax)

Post by Electron »

There is a thread in the Fairmark forum that addresses this subject.

https://fairmark.com/forum/topic/net-in ... ome-tax-2/
Enjoying the Outdoors
User avatar
ps56k
Posts: 980
Joined: Sat Mar 19, 2011 1:28 pm
Location: Chicago area

Re: Form 8960 (Net Investment Income Tax)

Post by ps56k »

just stumbled into this NIIT as per TurboTax - first time -
SO.... looks like I'll have to be more aware of investment income over the $250k threshhold -
Post Reply