8960 does not respect salt deduction limit
zakpatterson opened this issue · comments
For the reasonable methods of attributing state taxes to investment income, we are to use "any reasonable method" to derive a ratio of state and local taxes attributable to investment income. So
From instructions 8960 for line 9b:
State, local, and foreign income taxes if properly deducted on your return when calculating your U.S. regular income tax.
Does that mean state and local taxes are not deductible for 8960 if the standard deduction is taken?
They should also be subject to the $10,000 cap?
Does that mean state and local taxes are not deductible for 8960 if the standard deduction is taken?
They should also be subject to the $10,000 cap?
These are both very good questions. I have researched both several times since 8960 first appeared and found a variety of inconsistent answers. Different tax software (TurboTax, TaxAct, etc.) have taken different approaches, and some have changed from one to another over time. I don't think there is clear guidance in IRS publications. I haven't checked to see if there is anything new this year.
My understanding based on looking at the tax code a few years ago is that the $10,000 cap should be applied after prorating the amount attributable to investment income, and they are deductible even if the standard deduction is used.
However the latter point is in direct contradiction to the sentence you quoted from the instructions.
I'm not an expert in deciphering the arcanity of the tax code. One argument I read hinged on the difference between "allowed" and "allowable" which was lost on me.
One option might be a cop-out -- let the user choose.
FWIW, Drake Tax calculates it as so:
Line 9b is calculated from the state, local, and foreign income tax attributable to NII - generally Schedule A, line 7.* This amount is subject to limitation based on the ratio of Form 8960, line 8 divided by the AGI on Form 1040.
For example, state income tax deducted was limited to $10,000 on Wks SALT. The amount on Form 8960, line 8 is $25,000 with an AGI of $100,000. The total amount allowed to flow to Form 8960, line 9a would be (25000/100000) X 10000= $2,500.