How to Calculate the State Income Tax Deductions on Form 8960, Part II, Line 9b

Form 8960 - Net Investment Income Tax – Individuals, Estates, and Trusts was released by IRS in 2013. The purpose of this form is to computer the 3.8% net investment income tax on the lesser of an individual’s net investment income for the tax year or the excess of the individual’s modified adjusted gross income for the tax year over a threshold amount.

Part I of form 8960 is used to calculate total investment income. Part II is used to calculate total deductions allocable to investment income. On line 9b of part II, you should include any state, local or foreign income taxes you paid that are attributable to net investment income. Your total state income tax can be the state, local or foreign income tax you deducted on schedule A line 5a of Form 1040, or the state, local or foreign income taxes you actually paid for the year if you don't use schedule A to take itemized deductions. You will need to allocate the total tax between net investment income and excluded income if your investment income is only part of the income you reported on your tax return. IRS allows you to use any reasonable method to determine the portion of taxes allocable to net investment income. The example below shows one method that you can use to calculate the state income tax for Part II, line 9b:

Assume you report the following items on your tax return. You can allocate $20,000 state income tax by the ratio of $30,000 total investment income on line 8 of Form 8960 to $300,000 adjusted gross income on line 38 of Form 1040 to get the state income tax deduction for Part II, line 9b.

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