Part — Instruction 8960 — Instructions for Form

Investment Expenses Part II of Form 8960 includes deductions and modifications to NII that aren’t otherwise included in Part I.

Generally, expenses associated with a passive activity trade or business, or the trade or business of trading in financial instruments or commodities conducted through a pass-through entity, are already included on line 4a or on line 5a. Part II is used to report deductions that are, predominately, itemized deductions.

Itemized deductions are calculated separately for purposes of figuring NII under section 1411 by identifying which deductions are properly allocable to items of gross investment income.

Investment expenses are described under section 163(d)(4)(C) as the deductions allowed for regular income tax purposes (other than for interest) which are directly connected with the production of investment income. If allowed for regular income tax purposes, these specific deductions are subtracted from total investment income to arrive at NII.

For more information on properly allocable deductions, see Regulations sections 1.1411-4(f)–(g).

If you operate a trade or business, don’t include

TIP expenses that have been deducted on other lines

of the Form 8960, such as depletion or depreciation reported on Schedules C, E, and F (Form 1040) and included on Form 8960, line 4a.

Reasonable method allocations. To the extent that you have a properly allocable deduction that’s allocable to both NII and excluded income, you may use any reasonable method to determine that portion of the deduction that’s properly allocable to NII. The items that may be allocated between NII and excluded income are the following.

Certain taxes under section 164(a) reported as itemized deductions, if properly deducted on your return when calculating your U.S. regular income tax. Allowed deductions can include state, local, and foreign income taxes; state, local, and foreign real property taxes; and state and local personal property taxes. Total tax deductions 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. These deductions under section 164 for state, local, and foreign taxes are excepted from miscellaneous itemized deductions per section 67(b)(2).
Certain ordinary and necessary expenses paid or incurred during the tax year if properly deducted on your return when calculating your U.S. regular income tax. For individuals, expenses related to the production of income from section 212 activities, if attributable to property held for the production of rents or royalties, are allowable adjustments to AGI. Allowable deductions include expenses associated with the production or collection of income; the management, conservation, or maintenance of property held for the production of income; and expenses to determine, collect, or obtain a refund of any tax owed. See generally section 62(a)(4). Section 611 expenses for depletion that are attributable to property held for the production of rents or royalties are also allowable adjustments to AGI. See Section 212 expenses deductible in computing adjusted gross income , below.

• Amounts paid or incurred by the fiduciary of an estate or trust on account of administration expenses, including

16 Instructions for Form 8960 (2025)

fiduciaries’ fees and expenses of litigation, which are ordinary and necessary in connection with the performance of the duties of administration if properly deducted on your return when calculating your U.S. regular income tax under section 67(e).

Section 212 expenses deductible in computing adjusted gross income. For individuals, the deductions under section 212 for ordinary and necessary expenses would typically be classified as miscellaneous itemized deductions; however, section 62(a)(4) defines AGI as gross income less allowable (above-the-line) deductions under section 212, relating to expenses for the production of income attributable to property held for the production of rents or royalties. Regulations section 1.1411-4(f)(2) allows section 62(a)(4) deductions for individuals with an activity related to property held for the production of rents or royalties. Individuals are allowed an above-the-line deduction for expenses related to that activity (even if the activity related to property held for the production of rents or royalties doesn't rise to the level of a trade or business).

Allowable deductions attributable to property held for the production of rents or royalties also includes depletion under section 611.

A section 62(a)(4) above-the-line deduction includes section 212 amounts paid for tax advice related to property held for the production of rents or royalties, for example, preparation of Schedule E, and amounts paid for resolving an asserted tax deficiency related to property held for the production of rents or royalties, and are allowed in figuring adjusted gross income. Note, however, that expenses to perfect or defend Title are not allowed under Regulations section 1.263(a)-2(e).

If you have more than one of the deductions described above, you may use a different method of allocation for each one. The reasonable method of allocation may differ from year to year.

Examples of reasonable methods of allocation include, but aren’t limited to, an allocation of the deduction based on the ratio of the amount of a taxpayer’s gross investment income (Form 8960, line 8) to the amount of the taxpayer’s AGI. In the case of an estate or trust, an allocation of a deduction under Regulations section 1.652(b)-3(b), and in the case of an ESBT, Regulations section 1.641(c)-1(h), is also a reasonable method.

Example. An example will illustrate a reasonable method of allocation.

Deductions taken into account in figuring net investment income (NII) can include adjustments to income and itemized deductions. The itemized deduction for state and local income taxes under section 164(a)(3) is an allowable deduction listed in Regulations section 1.1411-4(f)(3)(iii) that specifically requires application of the Regulations section 1.1411-4(g)(1) allocation rules. Deductions that are allocable to both NII and excluded income may be determined by using any reasonable method, per Regulations section 1.1411-4(g)(1). For illustrative purposes, one reasonable method may be an allocation of a deduction based on an NII-to-gross income ratio.

Assume a taxpayer, who is an unmarried individual and a U.S. citizen, earns $100,000 in wages and $60,000 of

Schedule E (Form 1040) net rental income. Total income is $160,000 ($60,000 + $100,000). Wages are not subject to the net investment income tax (NIIT) under Regulations section 1.1411-1(d)(4)(ii), but the Schedule E income is subject to NIIT under section 1411(c)(1)(A) and (B). The Schedule E income makes up 38% of gross income ($60,000/$160,000).

Taxpayer reports $10,000 on Schedule A (Form 1040) for section 164(a)(3) state and local income taxes, allowable under Regulations section 1.1411-4(f)(3)(iii). Under the NII-to-gross income ratio, the taxpayer allocates 38% of the $10,000 deduction ($3,800) to NII and 62% of the $10,000 deduction ($6,200) to excluded income (wages). Taxpayer has no other allowable deductions.

The taxpayer’s NII is $56,200 ($60,000 - $3,800).

Note: If an estate or trust allocates expenses for regular income tax purposes under Regulations section 1.652(b)-3(b) or 1.641(c)-1(h), any deviation from that allocation may not be a reasonable allocation method for NIIT purposes.

Items not deductible in calculating net investment in- come. Unless a deduction is specifically identified as properly allocable to NII in the section 1411 regulations, or in supplemental guidance issued by the IRS in the Internal Revenue Bulletin, the deduction isn’t permitted.

Line 9a—Investment Interest Expense

Investment interest expense is excepted from miscellaneous itemized deductions under section 67(b)(1) and is a properly allocable expense for purposes of figuring NII.

Enter on Form 8960, line 9a, interest expense you paid or accrued during the tax year deducted on Schedule A (Form 1040), line 9. Estates and trusts enter the amount from Form 4952, line 8 (if not required to file Form 4952, use the form as a worksheet). For individuals filing a Form 1040-NR, include only the amount of investment interest expense deduction for your U.S. residency period.

Note: If Form 4952 includes investment interest expense that’s deducted on Schedule E (Form 1040) and already taken into account on line 4a, don’t include the same amount on line 9a.

Note: If you own a CFC or QEF for which a section 1.1411-10(g) election isn’t in effect, you may calculate your section 163(d) investment expense deduction for NIIT purposes differently than for regular income tax purposes. See Regulations section 1.1411-10(c)(5) for additional guidance. Any modification to your section 163(d) investment expense deduction for NIIT purposes is taken into account on line 6.

Line 9b—State, Local, and Foreign Income Tax

Include state, local, and foreign income taxes you paid for the tax year that are attributable to NII. Include also state, local, and foreign real property taxes paid for the tax year, as well as state and local personal property taxes paid that are attributable to NII. See the Instructions for

Instructions for Form 8960 (2025) 17

Schedule A (Form 1040) for information and potential limits to state and local income taxes. (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.)

Form 1040-NR filers include only taxes paid for the U.S. residency period of the tax year. Sales taxes aren’t deductible in computing NII. You may not take a deduction for any foreign income taxes paid for the tax year if you took a credit for any portion of them. See section 275(a) (4).

You can determine the portion of your state, local, and foreign income taxes; state, local, and foreign real property taxes; as well as state and local personal property taxes allocable to NII using any reasonable method. See Reasonable method allocations, earlier.

Enter the amount of state, local, or foreign income taxes; state, local, and foreign real property taxes; as well as state and local personal property taxes on Form 8960, line 9b.

Section 212 expenses deductible in computing adjusted gross income , earlier, for details.

Enter the amount of allowed miscellaneous investment expenses on Form 8960, line 9c.

Dual-status individuals include only tax items related to their period of U.S. residency. See Dual-status individual , earlier.

If you operate a trade or business, don’t include

TIP expenses that have been deducted on other lines

of the Form 8960, such as depletion or depreciation reported on Schedules C, E, and F (Form 1040) and included on Form 8960, line 4a.

DO NOT use the Lines 9 and 10—Itemized