When calculating NIIT, one is instructed to use a “reasonable method” to allocate state tax to investment income. The example given of a reasonable method is to use the ratio of investment income to AGI.
Would it be “reasonable” to instead recompute your state tax assuming zero investment income, and allocate the difference between that and your actual state tax?
I’ve heard the term “before and after” method mentioned on this forum. Is this what I’ve just described, or something else? Any suggestions on where I can read up on this?
This topic was modified 1 week, 5 days ago by sselm.
My tax spreadsheet uses the percent of AGI as described in the instructions. The calculation has not actually come into play with AGI minus the specified threshold resulting in the lower tax.
In regards to the tax deduction, the instructions state that you can allocate state, local, and foreign income taxes if properly deducted on your return. Your proposal does not appear consistent with that requirement.
I also wonder if the default method is entirely correct since one might be deducting some taxes related to the previous tax year that were paid in the current tax year. As I recall a similar issue has come up with deductions related to the Foreign Tax Credit.