Question

State Tax Deductions on NIIT

Forum|Forum|5 years ago
March 15, 2021
1 reply
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Where to enter State Tax deduction for NIIT tax?

TurboTax Live Deluxe Online

It depends. If you have a 8960 in your return, the NIIT should have been populated automatically in the return. Please read this IRS link for the instructions regarding 9b. it suggests that this is added to state, local and property taxes. You can only claim this if you itemize your deductions for the year. This amount is capped at $10K for all these types of taxes paid.

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T

tacopa

To clarify what you said: If I don't itemize, and use the standard deduction, I can not deduct State Tax I paid against the net investment income.

Is there an official document that clearly says that state tax deduction is applicable only when you itemize, and not when you take standard deduction? What I see is "properly allocable" term, and no one is explicitly saying that this is applicable when you take itemized deductions.

Can you please help me point to the document that made this interpretation? Thanks.

DaveF1006

I have some long term capital gains shown on Schedule K-1. I am doing Standard deduction as Turbo tax suggested. It shows zero value in 9b on form 8560.

Is Turbo tax correct in doing that? I dont even know what my itemized de duction number would be because Turbo tax never gave me that number or asked for it, so won't know if this deduction for State taxes paid would be applicable or not.

Say, I have a total AGI of 300k and therefore my excess for Net Investment income tax calculation is 50000. TT calculated NII @ 3.8%. However, i have paid State tax on this 50k at 5% . So should i deduct the 2500 paid as State tax in 9b in Form 8960 to reduce my NII? My Standard deduction number would probably be more than what i would get in itemized deduction.

Any inputs from the TT folks would be helpful.

thanks

TurboTax calculates Form 8960, Line 9b based on a formula that considers your total investment income, total adjusted gross income (AGI), and state, local, and foreign taxes paid. However, Line 9b is zero if you do not itemize your deductions. Since you're taking the Standard Deduction, TurboTax does not include state taxes paid in the calculation.

Regarding your Net Investment Income Tax (NIIT):

Your AGI is $300,000, meaning your excess over the threshold is $50,000.
TurboTax correctly applied the 3.8% NIIT, resulting in a tax of $1,900.
You paid state tax on the $50,000 at 5%, which amounts to $2,500.
Normally, state taxes paid on investment income can be deducted on Line 9b, but only if you itemize deductions.

Since TurboTax is showing zero on Line 9b, it likely means that state taxes paid are not being deducted because you are using the standard deduction. If you were to itemize, a portion of your state tax paid could be allocated to reduce your net investment income, potentially lowering your NIIT.

Itemized deductions include things like mortgage, interest, state taxes paid up to $10,000, medical expenses in excess of 7.5% of your AGI, charitable contributions etc.. You may enter these in the deductions and credits section of your return. Once entered, TurboTax will decide which is the better deduction for you to take. If you didn't enter itemized deductions, then the standard deduction amount will be applied by default.

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