Net investment income ignores Form 8960 line 9a: investment interest an itemizer deducts doesn't reduce NIIT #10219

Title: Net investment income ignores Form 8960 line 9a: investment interest an itemizer deducts doesn't reduce NIIT

Problem

net_investment_income is the sum of gov.irs.investment.income.sources, with no deductions. Treas. Reg. 1.1411-4(f)(3)(i) makes investment interest a properly allocable deduction "to the extent allowed under section 163(d)(1)". Form 8960 line 9a takes it from Schedule A line 9. So for a filer who itemizes, NII and the NIIT are overstated by the deducted investment interest.

A filer who takes the standard deduction deducts no investment interest on Schedule A. Line 9a is then zero, and PolicyEngine gets that case right.

Reproduction (main, 2.42.0)

Synthetic cases: 2025, single, TX, $400,000 wages.

Second case: Schedule A line 9 is $30,000 (within the $100,000 of 163(d) investment income). Line 8 NII is $100,000 − $30,000 = $70,000, and 3.8% × min($70,000, $500,000 − $200,000) = $2,660.

Proposed fix

Subtract the investment interest deducted on Schedule A when the tax unit itemizes. After #9977 that is investment_interest_expense_deduction; before it, the deducted investment_interest_expense.

The same gap exists for line 9b (state income tax allocable to NII, 1.1411-4(f)(3)(iii)). I'd keep that separate, unless you'd rather add a line 9 deductions list now that both could join.

Sources

• Treas. Reg. 1.1411-4(f)(1), (f)(3)(i): "In determining net investment income, the following itemized deductions are taken into account: (i) Investment interest expense. Investment interest (as defined in section 163(d)(3)) to the extent allowed under section 163(d)(1)."
• 2025 Instructions for Form 8960, line 9a, PDF p. 17: "Enter on Form 8960, line 9a, interest expense you paid or accrued during the tax year deducted on Schedule A (Form 1040), line 9."
• 26 U.S.C. 1411(c)(1)(B).