Line 9b of Form 8960 is where you report the portion of your state, local, and foreign income taxes, real property taxes, and personal property taxes that is attributable to your net investment income. The amount reduces the income base before the 3.8% Net Investment Income Tax is applied. There is no official worksheet for this line, so you choose a reasonable allocation method, run the numbers, and keep documentation that supports the result.
What Belongs on Line 9b
Despite its name, “State, Local, and Foreign Income Tax,” the line covers three categories of taxes you paid during the year that relate to your net investment income:1Internal Revenue Service. Instructions for Form 8960
- State, local, and foreign income taxes
- State, local, and foreign real property taxes
- State and local personal property taxes
Only the share of these taxes connected to your net investment income goes on the line. Sales taxes are never deductible for NIIT purposes.
Line 9b is strictly about taxes. Passive activity costs like depreciation, repairs, insurance, property management fees, and mortgage interest on rental property do not belong here. Those expenses are already netted into the rental or passive income figure that flows through Schedule E to Line 4a of Form 8960, so including them again on Line 9b would double-count them.
How to Allocate Your Taxes
The IRS does not prescribe a single formula. You must use “any reasonable method” to determine the portion of your taxes attributable to net investment income.1Internal Revenue Service. Instructions for Form 8960 The instructions give one worked example: allocating by the ratio of gross investment income to total adjusted gross income.
The Ratio Method
Take your gross investment income from Form 8960, Line 8. Divide it by your AGI from Form 1040. Multiply that percentage by the total state and local taxes you actually deducted on your income tax return. The result is your Line 9b figure.
Say your gross investment income is $80,000, your AGI is $320,000, and you paid $16,000 in state income tax. The ratio is 25%. Twenty-five percent of $16,000 is $4,000, which goes on Line 9b and reduces your net investment income before the 3.8% tax applies.
Other Reasonable Methods
You are not locked into the ratio approach. Some taxpayers apply their state’s actual tax rate directly to their investment income. Others track which specific income items triggered which state tax liabilities and allocate on that basis. Any method works if it logically connects the tax paid to the investment income that generated it. The general framework sits in the regulations under Section 1.1411-4(g)(1).2eCFR. 26 CFR 1.1411-4 – Definition of Net Investment Income
Pick a method and stay with it. Switching year to year without a reason invites questions if your return is reviewed.
How the SALT Cap Limits Line 9b
You can only include taxes on Line 9b that you actually deducted for regular income tax purposes. The Form 8960 instructions note that 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.”1Internal Revenue Service. Instructions for Form 8960
Property taxes on a rental building held as a trade or business, or state taxes tied directly to an investment activity producing rents or royalties, escape the SALT cap. State income taxes on dividends and interest, which are not connected to a trade or business, fall under it. For 2026, the SALT deduction limit is $40,000 for most filers and $20,000 for married filing separately, with a phase-down starting at $500,000 of modified AGI.3Internal Revenue Service. Topic No. 503, Deductible Taxes
If your Schedule A SALT deduction is already capped, the pool of taxes available to allocate on Line 9b is capped along with it.
Foreign Taxes: Credit or Deduction, Not Both
Foreign income taxes follow the same allocation rules on Line 9b, with one hard restriction: you cannot deduct foreign taxes on Line 9b if you claimed a foreign tax credit for any part of those same taxes.1Internal Revenue Service. Instructions for Form 8960 Under Section 275(a)(4), the choice is all-or-nothing.
Most taxpayers prefer the foreign tax credit on the regular return, since a credit cuts tax dollar for dollar while a deduction only reduces the income base.4Internal Revenue Service. Foreign Tax Credit – Choosing to Take Credit or Deduction But the credit on Form 1116 only offsets your regular income tax. There is no foreign tax credit against the NIIT. Taking the credit on the regular return means losing the Line 9b deduction against the NIIT.
For taxpayers with substantial foreign investment income, especially where the foreign tax credit limitation formula caps the credit, the Line 9b deduction can occasionally come out ahead. The way to know is to model both scenarios.
What Does Not Belong on Line 9b
Line 9b sits between two other expense lines in Part II of the form. Keeping them straight prevents misclassification.
Line 9a is for investment interest expense: interest you paid on money borrowed to buy taxable investments. If you deducted investment interest on Schedule A, Line 9, the same amount goes on Line 9a. Estates and trusts pull from Form 4952, Line 8. If Form 4952 already includes interest that was deducted on Schedule E and baked into Line 4a, do not count it again on Line 9a.1Internal Revenue Service. Instructions for Form 8960
Line 9c is for miscellaneous investment expenses. For most individuals this line is now zero. The suspension of miscellaneous itemized deductions that began with the Tax Cuts and Jobs Act has been made permanent, so investment advisory fees and tax preparation costs allocable to investment income are no longer deductible.1Internal Revenue Service. Instructions for Form 8960
All three lines total to Line 11 and reduce gross investment income on Line 8 to produce the net investment income on Line 12.
Recordkeeping
The IRS instructions warn that items of investment income and expense may receive different treatment for NIIT than for regular income tax, and that you need to keep records and worksheets for Form 8960 items.5Internal Revenue Service. Instructions for Form 8960 Net Investment Income Tax Individuals Estates and Trusts For investments with basis calculations, hold records for the entire life of the investment.
For Line 9b, document the method you used, show the inputs (gross investment income, AGI, total taxes paid), and keep the calculation. Because there is no official worksheet, your own documentation is what you have if the number is questioned. A simple spreadsheet saved with your tax records is usually enough.
Penalty Exposure if You Get It Wrong
Overstating Line 9b understates your NIIT and creates an underpayment. If the understatement is substantial, the IRS can impose a 20% accuracy-related penalty on the underpaid amount.6Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments For individuals, “substantial” means the understatement exceeds the greater of 10% of the tax that should have been shown on the return or $5,000. The penalty reaches negligence, disregard of rules, and substantial understatements.
Reasonable cause can waive the penalty. A method chosen in good faith, applied consistently, and documented is defensible.7Internal Revenue Service. Accuracy-Related Penalty The flexibility built into the “reasonable method” standard works in your favor here, as long as your workpapers show what you did and why.