Line 9b of Form 8960 is where you deduct the share of state, local, and foreign taxes you paid that is allocable to your net investment income. It covers three categories of taxes: state, local, and foreign income taxes; state, local, and foreign real property taxes; and state and local personal property taxes.1Internal Revenue Service. Instructions for Form 8960 Sales taxes never qualify. Only the portion tied to investment income belongs on the line, and the IRS lets you choose any reasonable method to work out that portion.
What Line 9b Covers, and What It Doesn’t
The line is titled “State, Local, and Foreign Income Tax,” but the instructions read it more broadly than the title suggests. Income taxes qualify. Real property taxes qualify. Personal property taxes qualify. Sales taxes do not, even if you deducted them on Schedule A in place of state income tax.1Internal Revenue Service. Instructions for Form 8960
One boundary matters before you start allocating. Line 9b is only for taxes. Operating expenses of a rental property or passive business — depreciation, repairs, insurance, management fees, mortgage interest — do not go here. Those flow through Schedule E and are already netted into the passive income figure on Line 4a of Form 8960 before that number ever hits the form. Putting them on Line 9b would deduct them twice.
How to Calculate the Amount on Line 9b
The Form 8960 instructions require you to use “any reasonable method” to determine how much of your taxes is attributable to net investment income.1Internal Revenue Service. Instructions for Form 8960 The regulations under Section 1.1411-4(g)(1) set the general framework but do not prescribe a formula.2eCFR. 26 CFR 1.1411-4 – Definition of Net Investment Income
The Ratio Method
The instructions themselves offer one example: allocate based on the ratio of your gross investment income to your total adjusted gross income. Three inputs feed the calculation:
- Gross investment income from Form 8960, Line 8
- Adjusted gross income from Form 1040
- Total qualifying state, local, and foreign taxes you actually deducted
Divide gross investment income by AGI, then multiply that percentage by the taxes deducted. The product 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 percent. Multiply $16,000 by 25 percent for a Line 9b deduction of $4,000. That $4,000 comes off your investment income before the 3.8 percent tax is applied.
Other Reasonable Methods
You are not locked into the ratio. Some taxpayers apply their state’s actual tax rate directly to their investment income. Others do a more granular allocation that tracks which specific income items produced which state tax liabilities. Any approach is defensible if it logically connects the tax paid to the investment income that generated it. Pick a method, apply it consistently from year to year, and keep the working papers. Changing methods without a reason draws attention if the return is examined.
How the SALT Cap Limits Line 9b
You can only put taxes on Line 9b that you actually deducted for regular income tax purposes. That connects Line 9b directly to the state and local tax deduction cap.
The Form 8960 instructions state that the total taxes eligible for Line 9b “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, and state taxes directly tied to an investment activity that produces rents or royalties, are outside the cap. State income tax on ordinary dividends and interest is inside it.
For 2026, the SALT deduction limit is $40,000 for most filers, or $20,000 if married filing separately, with a phase-down for modified AGI above $500,000.3Internal Revenue Service. Topic No. 503, Deductible Taxes If your Schedule A SALT deduction is already at the cap, the pool of taxes available to allocate to Line 9b is capped along with it.
Foreign Taxes: Credit or Deduction, Not Both
Foreign income taxes follow the same allocation rules, with one restriction that shapes the whole calculation. You cannot include foreign taxes on Line 9b if you claimed a foreign tax credit for any portion of those same taxes.1Internal Revenue Service. Instructions for Form 8960 It is all or nothing under Section 275(a)(4).
The complication is that the foreign tax credit on Form 1116 offsets your regular income tax, not the NIIT. No foreign tax credit exists against the NIIT itself. So the choice comes down to a modeling problem: take the credit on your regular return and give up the Line 9b deduction, or forgo the credit and use those foreign taxes to reduce your NIIT base instead.4Internal Revenue Service. Foreign Tax Credit – Choosing to Take Credit or Deduction The credit usually wins because it reduces tax dollar-for-dollar rather than reducing income. For taxpayers with heavy foreign investment income whose credit is squeezed by the Form 1116 limitation, the NIIT deduction can sometimes come out ahead. Run both.
How Line 9b Fits With Lines 9a and 9c
Part II of Form 8960 has three expense lines, and they do not overlap.
Line 9a is investment interest expense. If you deducted investment interest on Schedule A, Line 9, that same figure goes on Line 9a. Estates and trusts pull the number from Form 4952, Line 8.1Internal Revenue Service. Instructions for Form 8960 Watch out for double-counting: if investment interest already flowed through Schedule E and was netted into Line 4a, do not repeat it on Line 9a.
Line 9c is miscellaneous investment expenses. For most individual filers this line is now zero. The suspension of miscellaneous itemized deductions 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
Lines 9a, 9b, and 9c feed into total investment expenses on Line 11, which is subtracted from gross investment income on Line 8 to reach net investment income on Line 12.
Documentation and Penalty Exposure
There is no IRS worksheet for Line 9b. If the number is questioned, your own records are the whole defense. The Form 8960 instructions warn explicitly that investment items may be treated differently for NIIT than for regular tax and that you should keep the records and worksheets supporting each figure on the form.5Internal Revenue Service. Instructions for Form 8960 Net Investment Income Tax Individuals Estates and Trusts
For Line 9b, that means recording which allocation method you chose, the inputs you used (gross investment income, AGI, taxes actually deducted), and the arithmetic. A spreadsheet saved with the return is enough in most cases.
Overstating Line 9b understates the NIIT, and a substantial understatement can trigger a 20 percent accuracy-related penalty.6Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments For individuals, an understatement is substantial when it exceeds the greater of 10 percent of the tax that should have been shown or $5,000. Reasonable cause is a defense: a good-faith method, applied consistently and documented, can support a waiver.7Internal Revenue Service. Accuracy-Related Penalty The “reasonable method” standard actually works in your favor here, because a well-documented approach is inherently defensible even if the examiner would have chosen differently.