NIIT and new law limitation on SALT

So far I haven't seen anything in the new tax act that for 2017 or future years would limit the deduction for allocable state income taxes against investment income, regardless of when paid.

What did I overlook?

Len Raphael
Oakland, CA

Not that form instructions are authority, but you should review the instructions to Form 8960, Line 9b.

The $10K limit will also limit the state tax deduction on the Form 8960.

"The $10K limit will also limit the state tax deduction on the Form 8960."

I can't see how you got that from the Line 9b instructions. Neither IRC section 67 (2%-of-AGI threshold) nor 68 (Pease) are directly tied to the state/local income tax deduction on Schedule A. My guess, without further research, is that NII is a parallel tax system (parallel to regular tax and AMT -- each of the three systems having its own concept of taxable income, and its own tax rates). As such it is not necessarily tied to limits that exist in the regular tax and AMT, and likewise in the other direction too. If they didn't specifically amend the NII section of the code, then I don't see the direct linkage between the new $10K SALT limit for regular tax, and the NII deduction for state and local income taxes allocable to NII.

You are correct, makbo. I was making a statement of fact where the facts do not exist. I will go out on a limb and say 'do not yet exist'.

As you noted, the Form 8960 deductions mirror the allowable deductions on the Sch A with regards to the 2% threshold and the Pease phase out. You cannot deduct more on the Form 8960 than what has been deducted on the Sch A. I believe the same will be true for the $10K limitation on SALT once the technical corrections roll out.

Which means I suppose that an optimization of the $10K allocated between property tax and income tax will have to be made. Under regular tax, including the state, you may be better off putting all your property tax first toward the $10K limit; for NII purposes, you would be better off putting all your state income tax first toward the limit, then property tax if anything left to use.

I agree that it is unclear right now how the deduction for state and local income taxes will be impacted for NIIT purposes. The Treasury Department could write the new regulation either way.