Technical topics regarding tax preparation.
Net investment income tax state and local tax deduction
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14-Feb-2019 5:01pm

Hello. Are state and local taxes deductible on Form 8960 for purposes of calculating the net investment income tax beyond the allocable fraction of the $10,000 ceiling for SALT? The instructions to Form 8960 do not say anything specifically about the $10,000 limitation, though these same instructions state outright that the miscellaneous itemized deductions are suspended for the years 2018 - 2025.

As others on the forum have noted, IRC Sec. 1411(c)(1)(B) indicates that, for NIIT purposes, the deductions allowed include "the deductions allowed by this subtitle which are properly allocable [to NIIT]."

So, what does all this mean? Is the SALT deduction on Form 8960 limited to the allocable fraction of the $10,000 limit? Or can we deduct the allocable fraction of all state and local taxes paid?

14-Feb-2019 5:17pm

According to (g)(1) of the -4 reg. of 1.1411, it's all, not just $10,000.
Last edited by Nilodop on 15-Feb-2019 9:53am, edited 1 time in total.

14-Feb-2019 6:22pm

Are state and local taxes deductible on Form 8960 for purposes of calculating the net investment income tax beyond the allocable fraction of the $10,000 ceiling for SALT?


The deduction(s) on form 8960, specifically lines 9(a) 9(b) 9(c) have nothing to do with what is happening or not happening on Schedule A. You do not reduce the states paid on line 9(a) by what happened on Schedule A. And the elimination of 2% MID does not mean that the investment expenses are also eliminated for NIIT purposes.

15-Feb-2019 8:38am

In calculating NIIT, the BNA Income Tax Planner software limits the total deduction for SALT to $10,000, and allocates that amount proportionately to the net investment income, and the software also disallows the investment expenses. But of course it is possible BNA is calculating it incorrectly.

I don't know at this point how the tax prep software is handling it, I have not prepped a return with this issue.

15-Feb-2019 9:53am

Might BNA know more than Nilodop and Doug M?

15-Feb-2019 10:02am

1.1411-4(f)
(3)Properly allocable deductions described in section 63(d). In determining net investment income, the following itemized deductions are taken into account:
...
(iii)Taxes described in section 164(a)(3).State, local, and foreign income, war profits, and excess profit taxes described in section 164(a)(3) that are allocable to net investment income pursuant to paragraph (g)(1) of this section.

1.1411-4(g)
Special rules -

(1)Deductions allocable to both net investment income and excluded income. In the case of a properly allocable deduction described in section 1411(c)(1)(B) and paragraph (f) of this section that is allocable to both net investment income and excluded income, the portion of the deduction that is properly allocable to net investment income may be determined by taxpayers using any reasonable method. Examples of reasonable methods of allocation include, but are not limited to, an allocation of the deduction based on the ratio of the amount of a taxpayer's gross income (including net gain) described in § 1.1411-4(a)(1) to the amount of the taxpayer's adjusted gross income (as defined under section 62 (or section 67(e) in the case of an estate or trust)). In the case of an estate or trust, an allocation of a deduction pursuant to rules described in § 1.652(b)-3(b) (and § 1.641(c)-1(h) in the case of an ESBT) is also a reasonable method.

I added the emphasis.

15-Feb-2019 11:35am

Interesting how this question arose in this forum literally within a day or two of the new tax law coming into existence, and yet now, over a year later, we (or at least some of us) are still floundering a little.

Are investment expenses and state income taxes treated differently from each other for NII purposes, in terms of what is allowed under the regular tax? Here is a thread about investment expense and NII that seems to still leave the question open. Or if not, is there something conclusive, and where is it?

viewtopic.php?p=118450#p118450

" "Any deductions described in this paragraph (f) that are subject to section 67 (the 2-percent floor on miscellaneous itemized deductions) or section 68 (the overall limitation on itemized deductions) are allowed in determining net investment income only to the extent the items are deductible for chapter 1 purposes after the application of sections 67 and 68." Section 67(g) is part of section 67."

15-Feb-2019 12:02pm

Supdat #4: BNA had/has a bunch of mistakes in its software related to this new law. I don’t know the status anymore because after spending quite a bit of time on the phone with them, they still had a bunch of errors and then wanted me to pay $900 to renew. It was ridiculous – me, a sole practitioner, pointing out material errors to BNA. The point here is that just because BNA treats something a certain way in no way means that BNA is correct.

15-Feb-2019 2:02pm

Are investment expenses and state income taxes treated differently from each other for NII purposes, in terms of what is allowed under the regular tax?. State taxes are not "misc. itemized deductions under 67(b). I'm not sure OP is asking about the section 68 overall limit.

15-Feb-2019 2:29pm

The point here is that just because BNA treats something a certain way in no way means that BNA is correct.


I created my own QBI calculator…and tested it against BNA’s. I think BNA’s is accurate. As things have been clarified, BNA has updated its calculator accordingly. I can’t speak to it’s Planner. And I also can’t speak of the material errors you’re talking about. Maybe tell us what they are and we can test them against it’s current calculator.

Or if not, is there something conclusive, and where is it?


Nilodop cited the -4 Regulation, which of course was written before the $10k limit came into play. But that doesn’t matter. The actual heading in that NIIT regulation, under (f)(3), is “Properly allocable deductions described in Section 63(d).” Then when you go there, you’ll see that it says, “deductions allowable under this chapter.”

15-Feb-2019 3:25pm

My issue was with planner. They were CA issues, so perhaps not a concern to many, but to me, the errors and the lack of attention to fixing them were concerning. They were limiting property taxes to $10k. (This is the one error that they fixed). They were not deducting misc itemized deductions. There was no input for the interest expense on the mortgage debt over $750k that creates a higher deduction for CA than for fed. The CA AMT calculation was wrong. Those are the issues that I remember now - there might have been more.

15-Feb-2019 6:12pm

Hmmm..... Looking at my Lacerte calculations right now, and the Form 8960 worksheet for Line 9b is limiting to the $10k. Does anyone else have this problem? I am having the same issue as Supdat. I hate overriding so early in tax season....

15-Feb-2019 6:51pm

CalGalCPA wrote: Does anyone else have this problem? [...] I hate overriding so early in tax season....

UltraTax seems to be punting altogether for now, [edit - see following post] as it is showing nothing for the state/local tax allocated deduction against NII. (and the worksheet that is used is blank). I note that UT also reports Form 8960 as not being in final approval status yet, although it is available at the IRS website. (I assume there is a different list of efile approved forms from paper filed forms?)

I note the Form 8960 instructions (not authoritative) currently posted at IRS say this, which implies the Schedule A SALT limit does apply to NII deduction:

"State, local, and foreign income taxes if properly deducted on your return when calculating your U.S. regular income tax."
Last edited by makbo on 15-Feb-2019 7:21pm, edited 1 time in total.

15-Feb-2019 7:21pm

Wait! It's more complicated than that.

Here is my scenario:

MFJ, AGI $500,000

State income tax paid: $110,000
Allowed itemized deductions: $23,700 ($10K SALT including RE prop tax, plus mort int)
Allowed standard deduction: $24,000

When I default to the standard deduction, UT allows no state income deduction at all against NII (which I mistakenly thought of as "punting" in my previous post).

When I force itemized deduction, the NII worksheet recognizes the full amount of state tax paid, but limits it to the total allowed itemized deduction ($23,700).

So, UT is not limiting state tax deduction for NII to $10K, but it is limiting it to the state tax actually deducted for regular tax purposes, just like the form instructions state -- including none, if the standard deduction is taken.

17-Feb-2019 12:52pm

I just replicated my Lacerte calculations into BNA. They are BOTH limiting the Form 8960 state taxes to the $10k. Is everyone overriding their tax programs then? Is this an issue that appears still up in the air? I honestly don't know what to do here.

17-Feb-2019 4:04pm

They are BOTH limiting the Form 8960 state taxes to the $10k.

Good to know the software is doing it right. See Post #10.

17-Feb-2019 4:09pm

LOL. Thank you. I misunderstood your post and thought you were saying the opposite. I did more research after I posted, and did indeed determine "deductions allowed by Subtitle A" which does in fact limit the deductions.

Thanks.

8-Mar-2019 6:55pm

I still say the full amount of state income tax is available to be allocated to NII, not just $10K.

Consider:

1) the Form 8960 form and instructions nowhere refer to the the $10K SALT limit. If it was the IRS' position that SALT limit applied to NIIT calculation as well, surely they would have stated in the instructions something like "the amount of Line 9(b) due to state and local tax cannot exceed $10,000", but they didn't. Do you really think they are going to accept every return with a regular allocation on Line 9b, and then a year or two from now send out hundreds of thousands, or millions, of letters saying everyone needs to recalculate and pay more tax because the amount they deducted on Line 9b should never have exceeded $10K?

2) Thomson Reuters UltraTax latest version allows the full amount prior to calculating the allocation to NII. (my previous post with a sample UT calculation was still using a 2017 version of the allocation worksheet, it has been updated since then - but they never took the $10K SALT limit into account for NII purposes, even in earlier versions).

3) posts #2 and #3 agree it is all available for allocation, not just $10K.

4) The form instructions state, "State, local, and foreign income taxes if properly deducted on your return when calculating your U.S. regular income tax.". Well, the full amount of state tax was properly deducted (and officially disclosed per regulation) on Schedule A, but because of TCJA it was simply not "taken into account" for purposes of Sec 164. "Not taken into account" is not the same thing as "disallowed". (I am rejecting the implication I was pondering in my post #13).

Jeff-Ohio writes, "The actual heading in that NIIT regulation, under (f)(3), is “Properly allocable deductions described in Section 63(d).” Then when you go there, you’ll see that it says, “deductions allowable under this chapter.”"

And Section 63 is part of Chapter 1, while NIIT is part of Chapter 2A -- totally separate for this purpose. And I don't think the word "described" automatically includes all limitations that are elsewhere applied to items that are here only "described".

8-Mar-2019 7:21pm

I still find it very interesting how little discussion or news about this item can be found on the internet or in other discussion forums. Please post anything you find, or any facts about what specific vendors (other than the ones already mentioned) are doing about this calculation.

Here is a recent, inconclusive discussion from another forum:

https://www.bogleheads.org/forum/viewtopic.php?t=271074

When I search for "Net investment income tax form 8960 line 9b state and local tax deduction", it's worth noting that in the first few pages, several nationally-known Democratic politicians show up because they have released copies of their tax returns for public review.

8-Mar-2019 7:25pm

In prior years, those deductions were always limited to the amount allowed on Schedule A. It seems a bit bold to assume that the full amounts are allowable under the TCJA. The kind of decision I would talk over with the client before deciding.
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