Net Investment Income Tax and SALT deduction cap

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newacct
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Net Investment Income Tax and SALT deduction cap

Post by newacct »

On Form 8960 for the Net Investment Income Tax, line 9b, you can deduct the part of state and income tax allocable to your investment income. Suppose my state income tax for 2018 is more than $10,000, but I can only deduct $10,000 of it on Schedule A itemized deductions in 2018 due to the SALT deduction cap in the new tax law. Does that mean I can only take $10,000 and allocate that between my investment and non-investment income (and deduct the fraction of the $10,000 that is allocable to investment income)? or can I take the entire amount of my state income tax for the year (even though it's over $10,000) and allocate that between my investment and non-investment income (and deduct the part that is allocable to investment income)?

I saw a line in the Form 8960 instructions, page 12, section "Reasonable method allocations", that says:
The three items that may be allocated between net investment income and excluded income are the following.

• State, local, and foreign income taxes if properly deducted on your return when calculating your U.S. regular income tax.
I did properly deduct my state income tax on my federal tax return when calculating my regular federal income tax, but I could only deduct $10,000 of it. So I am wondering if that means I can only allocate $10,000 between investment income and other income, or I can allocate all of my state income tax between investment income and other income.
kaneohe
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Re: Net Investment Income Tax and SALT deduction cap

Post by kaneohe »

Perhaps before you worry about this, it might be worth determining if your NIIT is determined by the NII or by the amount of your AGI > threshold. In my case, it is determined by the amount over AGI threshold so I don't think I need to worry about the taxes.
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FiveK
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Re: Net Investment Income Tax and SALT deduction cap

Post by FiveK »

newacct wrote: Mon Jan 28, 2019 10:59 am ... I can allocate all of my state income tax between investment income and other income.
^This.

See p. 14 of form 8960:
Include state, local, and foreign income
taxes you paid for the tax year that are
attributable to net investment income.


See also https://www.law.cornell.edu/cfr/text/26/1.1411-4 that includes an example with >$10K state income tax.
grok87
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Re: Net Investment Income Tax and SALT deduction cap

Post by grok87 »

newacct wrote: Mon Jan 28, 2019 10:59 am On Form 8960 for the Net Investment Income Tax, line 9b, you can deduct the part of state and income tax allocable to your investment income. Suppose my state income tax for 2018 is more than $10,000, but I can only deduct $10,000 of it on Schedule A itemized deductions in 2018 due to the SALT deduction cap in the new tax law. Does that mean I can only take $10,000 and allocate that between my investment and non-investment income (and deduct the fraction of the $10,000 that is allocable to investment income)? or can I take the entire amount of my state income tax for the year (even though it's over $10,000) and allocate that between my investment and non-investment income (and deduct the part that is allocable to investment income)?

I saw a line in the Form 8960 instructions, page 12, section "Reasonable method allocations", that says:
The three items that may be allocated between net investment income and excluded income are the following.

• State, local, and foreign income taxes if properly deducted on your return when calculating your U.S. regular income tax.
I did properly deduct my state income tax on my federal tax return when calculating my regular federal income tax, but I could only deduct $10,000 of it. So I am wondering if that means I can only allocate $10,000 between investment income and other income, or I can allocate all of my state income tax between investment income and other income.
any consensus yet on this issue?
RIP Mr. Bogle.
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FiveK
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Re: Net Investment Income Tax and SALT deduction cap

Post by FiveK »

grok87 wrote: Sat Mar 16, 2019 7:40 am any consensus yet on this issue?
It does seem that the $10K limit applies here.

What is not as clear is whether one actually must take itemized deductions - as opposed to taking the standard deduction - on form 1040 in order to subtract any SALT attributable to NIIT on form 8960. See Net Investment Income Tax - Fairmark.com that unresolved question.
Thesaints
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Re: Net Investment Income Tax and SALT deduction cap

Post by Thesaints »

The spirit of the deduction is obviously that the federal government doesn’t want to extend the NIIT to that part of income taxed away by the states. As such, all state taxes paid are deductible and the SALT limit has nothing to do with it.
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FiveK
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Re: Net Investment Income Tax and SALT deduction cap

Post by FiveK »

Obviously there is not 100% consensus. ;)
libralibra
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Re: Net Investment Income Tax and SALT deduction cap

Post by libralibra »

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MarkNYC
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Re: Net Investment Income Tax and SALT deduction cap

Post by MarkNYC »

Thesaints wrote: Sat Mar 16, 2019 11:10 am The spirit of the deduction is obviously that the federal government doesn’t want to extend the NIIT to that part of income taxed away by the states. As such, all state taxes paid are deductible and the SALT limit has nothing to do with it.
That's not what the law says.

Code Sec 1411 and Reg. 1.1411-4 define Net Investment Income as the sum of interest, dividends, capital gains, etc., minus "the deductions allowed by subtitle A that are properly allocable to such income." Since $10K is the maximum state tax deduction allowed in computing income tax (subtitle A), then $10K would be the maximum state deduction allowed that could be properly allocable to investment income in the computation of NII.
grok87
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Re: Net Investment Income Tax and SALT deduction cap

Post by grok87 »

libralibra wrote: Sat Mar 16, 2019 2:21 pm
FiveK wrote: Tue Jan 29, 2019 12:29 am
newacct wrote: Mon Jan 28, 2019 10:59 am ... I can allocate all of my state income tax between investment income and other income.
^This.

See p. 14 of form 8960:
Include state, local, and foreign income
taxes you paid for the tax year that are
attributable to net investment income.


See also https://www.law.cornell.edu/cfr/text/26/1.1411-4 that includes an example with >$10K state income tax.
I think the page is saying you can allocate all the state income taxes, but you are still limited by the total that is shown at the bottom of Schedule A.

ie. you take the lesser of the [attributable non-capped state and local income tax] vs [total itemized deductions].

I think TT is doing this. With the standard deduction, it puts 0 on line 9b. With itemized, if the non-limited state income tax pro-rated over investment income is less than the total on Schedule A, then it is used for 9b. If the Schedule A amount is smaller (which includes the capped SALT), then it is used.

(and then as kaneohe says above, you look at [MAGI - threshold] vs [investment income - attributable deductions], and use the smaller amount to calculate NIIT)
Thanks.
It’s good to hear you think TurboTax is handling this correctly since that is what i’m Using.

So my question is this. Ignoring the NIIT, I am indifferent between choosing to deduct a) state and local income tax vs b) state sales tax. In fact I have a bias to choose b) since it eliminates the question of whether all or part of my state tax refund is federally taxable.

So the question is whether the fact that choosing a) slightly reduces my NIIT is worth the hassle of calling into question whether my state income tax refund is federally taxable?

I realize it’s hard to answer in the abstract.
RIP Mr. Bogle.
Thesaints
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Re: Net Investment Income Tax and SALT deduction cap

Post by Thesaints »

MarkNYC wrote: Sat Mar 16, 2019 2:47 pm
Thesaints wrote: Sat Mar 16, 2019 11:10 am The spirit of the deduction is obviously that the federal government doesn’t want to extend the NIIT to that part of income taxed away by the states. As such, all state taxes paid are deductible and the SALT limit has nothing to do with it.
That's not what the law says.

Code Sec 1411 and Reg. 1.1411-4 define Net Investment Income as the sum of interest, dividends, capital gains, etc., minus "the deductions allowed by subtitle A that are properly allocable to such income." Since $10K is the maximum state tax deduction allowed in computing income tax (subtitle A), then $10K would be the maximum state deduction allowed that could be properly allocable to investment income in the computation of NII.
Instructions on line 9b are pretty clear and have been quoted in earlier posts.
Maybe the confusion arises if one itimizes. In that case not all state taxes paid on the investments would be deductible, because they already reduce one taxable income and the federal government does not want you to double count.
But for anyone taking the standard deduction there is really no doubt the niit concerns only the financial income net of state taxes paid.
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Re: Net Investment Income Tax and SALT deduction cap

Post by MarkNYC »

Thesaints wrote: Sat Mar 16, 2019 5:30 pm
MarkNYC wrote: Sat Mar 16, 2019 2:47 pm
Thesaints wrote: Sat Mar 16, 2019 11:10 am The spirit of the deduction is obviously that the federal government doesn’t want to extend the NIIT to that part of income taxed away by the states. As such, all state taxes paid are deductible and the SALT limit has nothing to do with it.
That's not what the law says.

Code Sec 1411 and Reg. 1.1411-4 define Net Investment Income as the sum of interest, dividends, capital gains, etc., minus "the deductions allowed by subtitle A that are properly allocable to such income." Since $10K is the maximum state tax deduction allowed in computing income tax (subtitle A), then $10K would be the maximum state deduction allowed that could be properly allocable to investment income in the computation of NII.
Instructions on line 9b are pretty clear and have been quoted in earlier posts.
The language in IRS instructions for the preparation of tax forms is not authoritative, and does not override the specific language of the law/Internal Revenue Code.
Thesaints
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Re: Net Investment Income Tax and SALT deduction cap

Post by Thesaints »

So, what’s the meaning of being able to deduct state taxes from niit only if you itemize ? Doesn’t it strike you as a bizarre rule ?
The instruction refer to salt only insofar “allocating” state tax paid (between niit and schedule A, evidently) is concerned. That makes a whole lot of sense.
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Re: Net Investment Income Tax and SALT deduction cap

Post by MarkNYC »

Thesaints wrote: Sat Mar 16, 2019 5:53 pm So, what’s the meaning of being able to deduct state taxes from niit only if you itemize ? Doesn’t it strike you as a bizarre rule ?
The instruction refer to salt only insofar “allocating” state tax paid (between niit and schedule A, evidently) is concerned. That makes a whole lot of sense.
I don't think the rule is bizarre. Unfriendly to the taxpayer perhaps.

It's worth noting that in the link provided above by FiveK, Kaye Thomas the founder and moderator of the Fairmark Tax Forum also disagrees with your conclusions. You may want to click on the link and read his comments on the issue.
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Re: Net Investment Income Tax and SALT deduction cap

Post by FiveK »

MarkNYC wrote: Sat Mar 16, 2019 7:56 pm
Thesaints wrote: Sat Mar 16, 2019 5:53 pm So, what’s the meaning of being able to deduct state taxes from niit only if you itemize ? Doesn’t it strike you as a bizarre rule ?
The instruction refer to salt only insofar “allocating” state tax paid (between niit and schedule A, evidently) is concerned. That makes a whole lot of sense.
I don't think the rule is bizarre. Unfriendly to the taxpayer perhaps.

It's worth noting that in the link provided above by FiveK, Kaye Thomas the founder and moderator of the Fairmark Tax Forum also disagrees with your conclusions. You may want to click on the link and read his comments on the issue.
I'm equally as confused as the poster in that Fairmark thread who asked for a translation of the following:
Unless an individual makes an election under this subsection for the taxable year, no itemized deduction shall be allowed for the taxable year. For purposes of this subtitle, the determination of whether a deduction is allowable under this chapter shall be made without regard to the preceding sentence.
The first sentence seems to say that one must choose to itemize for an itemized deduction to be allowable.

The second sentence seems to say that, for some purposes, an itemized deductions may be used regardless of whether one has chosen to itemize.

Anyone know for which purposes the second sentence applies?
usaar33
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Re: Net Investment Income Tax and SALT deduction cap

Post by usaar33 »

libralibra wrote: Sat Mar 16, 2019 2:21 pm I think TT is doing this. With the standard deduction, it puts 0 on line 9b. With itemized, if the non-limited state income tax pro-rated over investment income is less than the total on Schedule A, then it is used for 9b. If the Schedule A amount is smaller (which includes the capped SALT), then it is used.
You are correct; this can be confirmed by looking at Turbotax's own "Form 8960 worksheet" (which they just made up as best as I can tell). They first prorate your state income taxes by what is allocable to investment income (see line 9b) and then cap it by the total itemized deductions (part 3, line 5).

I'm having a tough time accepting that NIIT SALT deductions are limited to $10k, given that one of the most popular tax programs isn't doing it that way.

Additionally:
  • It is odd that this is using state income taxes paid, rather than incurred (I realize form 8960's instructions imply you should do it this way), which results in all sorts of over or under deductions depending on when you actually paid your state income tax. (Regular tax system has this problem, but NIIT is much more volatile). Means you need to ensure to make estimated state tax payments by Dec 31 to not lose out on NIT deductability.
  • I'm wondering how safe it is to change the allocation methodology (overriding TT's data) to treat the state tax on net investment income as being assessed after all other ordinary income was [1]. This can reduce NII in states with progressive income taxes (you end up using the highest bracket you are in, not the effective rate) - and seems "reasonable" - the term the tax law uses.
[1] Or at least looking at how much state tax was owed already when the investment income was realized.
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Re: Net Investment Income Tax and SALT deduction cap

Post by Thesaints »

“The deductions allowable to such income” does not refer to the 10k SALT limit, which is the deduction allowed for taxable income determination purposes. Niit is another tax entirely and nowhere it is mentioned that a state tax deduction is limited to 10k.
Again, it would make no sense to tax net investment income without deductions allowed if one takes the standard deduction, while allowing state tax deduction if one itemizes.
Besides, one lists on schedule A the full amount of state taxes paid and the full amount of property taxes paid, then takes the smaller between that sum and 10k. Many taxpayers have amounts in excess of 10k for both state income and property taxes. How could anyone tell if the 10k eventually deducted is all state income, all property taxes, or a mix ?
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FiveK
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Re: Net Investment Income Tax and SALT deduction cap

Post by FiveK »

Thesaints wrote: Sun Mar 17, 2019 12:57 pm Again, it would make no sense to tax net investment income without deductions allowed if one takes the standard deduction, while allowing state tax deduction if one itemizes.
Unfortunately the law doesn't have to "make sense".

How do you interpret the words "itemized deductions" and the "Application of limitations under sections 67 and 68" in https://www.law.cornell.edu/cfr/text/26/1.1411-4?
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Re: Net Investment Income Tax and SALT deduction cap

Post by usaar33 »

Thesaints wrote: Sun Mar 17, 2019 12:57 pm Again, it would make no sense to tax net investment income without deductions allowed if one takes the standard deduction, while allowing state tax deduction if one itemizes.
There's lots of things that don't make sense with NIIT, but are the case. One of the silliest ones is that you have to use state taxes paid, not accrued. (This I'm convinced by is the case as Section 1.1411-4 specifically defines state taxes as functioning by Section 164(a)(3), which specifically requires using amount paid, not accrued.) It makes figuring out how much of your state tax paid was due to investment income basically an undecidable question (If I didn't pay enough tax.. what does that mean?)

Thesaints wrote: Sun Mar 17, 2019 12:57 pm Many taxpayers have amounts in excess of 10k for both state income and property taxes. How could anyone tell if the 10k eventually deducted is all state income, all property taxes, or a mix ?
You can certainly use state income tax first. None of this would get sorted out unless you get audited though.
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Re: Net Investment Income Tax and SALT deduction cap

Post by Thesaints »

FiveK wrote: Sun Mar 17, 2019 1:15 pm
Thesaints wrote: Sun Mar 17, 2019 12:57 pm Again, it would make no sense to tax net investment income without deductions allowed if one takes the standard deduction, while allowing state tax deduction if one itemizes.
Unfortunately the law doesn't have to "make sense".

How do you interpret the words "itemized deductions" and the "Application of limitations under sections 67 and 68" in https://www.law.cornell.edu/cfr/text/26/1.1411-4?
That only means you have to itemize them on Sched A, not that you can’t take the standard deduction and still enter them on line 9b (not subject to the 10k limit)
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Re: Net Investment Income Tax and SALT deduction cap

Post by Thesaints »

usaar33 wrote: Sun Mar 17, 2019 1:56 pm
Thesaints wrote: Sun Mar 17, 2019 12:57 pm Again, it would make no sense to tax net investment income without deductions allowed if one takes the standard deduction, while allowing state tax deduction if one itemizes.
There's lots of things that don't make sense with NIIT, but are the case. One of the silliest ones is that you have to use state taxes paid, not accrued. (This I'm convinced by is the case as Section 1.1411-4 specifically defines state taxes as functioning by Section 164(a)(3), which specifically requires using amount paid, not accrued.) It makes figuring out how much of your state tax paid was due to investment income basically an undecidable question (If I didn't pay enough tax.. what does that mean?).
That’s actually an advantage. We are getting a state tax refund, therefore the full tax on investment income can be assumed to have been paid.
This, even though we paid state taxes through W2 withholdings, which have nothing to do with investment income.
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FiveK
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Re: Net Investment Income Tax and SALT deduction cap

Post by FiveK »

Thesaints wrote: Sun Mar 17, 2019 1:57 pm
FiveK wrote: Sun Mar 17, 2019 1:15 pm
Thesaints wrote: Sun Mar 17, 2019 12:57 pm Again, it would make no sense to tax net investment income without deductions allowed if one takes the standard deduction, while allowing state tax deduction if one itemizes.
Unfortunately the law doesn't have to "make sense".

How do you interpret the words "itemized deductions" and the "Application of limitations under sections 67 and 68" in https://www.law.cornell.edu/cfr/text/26/1.1411-4?
That only means you have to itemize them on Sched A, not that you can’t take the standard deduction and still enter them on line 9b (not subject to the 10k limit)
While I want to agree (based on what seems fair), I can't find a way around the language of applying the section 68 $10K limit.

As already noted, the language defining "itemized deduction" is less clear (at least to me).

May not be resolvable until some court decision "decides" what is correct.
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Re: Net Investment Income Tax and SALT deduction cap

Post by Thesaints »

Don’t the instructions to 8960 state: overrall limitations to itemized deductions under section 68 are suspended from 2018 to 2027 ? Or something like that ?
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Re: Net Investment Income Tax and SALT deduction cap

Post by usaar33 »

Thesaints wrote: Sun Mar 17, 2019 2:13 pm Don’t the instructions to 8960 state: overrall limitations to itemized deductions under section 68 are suspended from 2018 to 2027 ? Or something like that ?
They are. Which actually led me to conclude that TT's calculation might just be due them failing to update the software.
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Re: Net Investment Income Tax and SALT deduction cap

Post by FiveK »

Thesaints wrote: Sun Mar 17, 2019 2:13 pm Don’t the instructions to 8960 state: overrall limitations to itemized deductions under section 68 are suspended from 2018 to 2027 ? Or something like that ?
You are correct - I mis-remembered what imposed the $10K limit. Still leaves the "itemized" ambiguity....
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Re: Net Investment Income Tax and SALT deduction cap

Post by usaar33 »

FiveK wrote: Sun Mar 17, 2019 2:28 pm You are correct - I mis-remembered what imposed the $10K limit. Still leaves the "itemized" ambiguity....
As explained over on Fairmark, the argument is that permitted deductions all flow from what you are taking on your own 1040 (they are allocated from the 1040/schedule A to NIIT system). The top of the code in Section 1411-4(a), states "(2) The deductions allowed by subtitle A that are properly allocable to such gross income or net gain (as determined in paragraph (f) of this section)."

Since the US tax code ( subtitle A ) doesn't permit more than $10k in SALT income taxes to be deducted, you can't allocate an excess of $10k to NIIT.

You can furthermore take this language to a further extreme and argue if you took a standard deduction (and didn't itemize), you can't reasonably allocate any of that deduction to NIIT (since you got it 100% even before NIIT).

I'm not entirely convinced by this reading though. This combined with the fact that a) Form 8960's instructions don't call out the salt limit (while they do call out the removal of the Section 68 limit!) and b) popular tax software like Turbotax doesn't follow that reading - lead me to believe this isn't going to be enforced.

That said, probably a good idea to not be more aggressive than the default "reasonable" allocation to not test this too much. :)
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Re: Net Investment Income Tax and SALT deduction cap

Post by FiveK »

usaar33 wrote: Sun Mar 17, 2019 3:43 pm
FiveK wrote: Sun Mar 17, 2019 2:28 pm You are correct - I mis-remembered what imposed the $10K limit. Still leaves the "itemized" ambiguity....
As explained over on Fairmark, the argument is that permitted deductions all flow from what you are taking on your own 1040 (they are allocated from the 1040/schedule A to NIIT system). The top of the code in Section 1411-4(a), states "(2) The deductions allowed by subtitle A that are properly allocable to such gross income or net gain (as determined in paragraph (f) of this section)."

Since the US tax code ( subtitle A ) doesn't permit more than $10k in SALT income taxes to be deducted, you can't allocate an excess of $10k to NIIT.
Yes, thanks, that is where the unambiguous $10K wording lies: 26 U.S. Code § 164(b)(6)(B)
You can furthermore take this language to a further extreme and argue if you took a standard deduction (and didn't itemize), you can't reasonably allocate any of that deduction to NIIT (since you got it 100% even before NIIT).
Or you can say that if NIIT income is 10% of overall income, then 10% of the state tax (up to $10K) allowed by subtitle A is subtractable for NIIT purposes, even if one chooses not to itemize. :confused
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Re: Net Investment Income Tax and SALT deduction cap

Post by usaar33 »

FiveK wrote: Sun Mar 17, 2019 4:08 pm
You can furthermore take this language to a further extreme and argue if you took a standard deduction (and didn't itemize), you can't reasonably allocate any of that deduction to NIIT (since you got it 100% even before NIIT).
Or you can say that if NIIT income is 10% of overall income, then 10% of the state tax (up to $10K) allowed by subtitle A is subtractable for NIIT purposes, even if one chooses not to itemize. :confused
Right, the question though is the meaning of "properly allocable" (.. are properly allocable to such gross income...). If you take the interpretation that this means you must have actually taken the deduction and are only trying to "allocate" part of the deduction to NIIT, then you can't subtract anything.
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Re: Net Investment Income Tax and SALT deduction cap

Post by FiveK »

usaar33 wrote: Sun Mar 17, 2019 4:42 pm If you take the interpretation that this means you must have actually taken the deduction and are only trying to "allocate" part of the deduction to NIIT, then you can't subtract anything.
Agreed - that assumption leads to that conclusion. :)

If you assume instead that it is "Taxes described in section 164(a)(3)" - but not, for example, taxes described in section 164(a)(1), (2), or (4) - that must be properly allocated, a different conclusion follows.

As it happens, the IRS specifically declined to provide illustrative examples on this point. See p. 63 in https://s3.amazonaws.com/public-inspect ... -28410.pdf:
The final regulations do not provide other examples of generally applicable reasonable allocation methods because the Treasury Department and the IRS believe that providing multiple examples of reasonable methods may lead to taxpayers to incorrectly conclude that the methods listed are the only acceptable methods. Therefore, the Treasury Department and the IRS believe that the final regulations allow taxpayers flexibility to determine a method of allocation that best applies to their specific facts.
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Re: Net Investment Income Tax and SALT deduction cap

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Re: Net Investment Income Tax and SALT deduction cap

Post by MarkNYC »

FiveK wrote: Sun Mar 17, 2019 4:08 pm Or you can say that if NIIT income is 10% of overall income, then 10% of the state tax (up to $10K) allowed by subtitle A is subtractable for NIIT purposes, even if one chooses not to itemize. :confused
No, because there is a difference in a deduction amount allowable vs a deduction amount allowed. The amount allowable is the amount permitted by law, whether deducted or not. The amount allowed is the amount actually deducted on the tax return (and not later reduced by IRS audit). So if the standard deduction is taken, zero state taxes are deducted on the tax return, thus zero "allowed".
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Re: Net Investment Income Tax and SALT deduction cap

Post by FiveK »

MarkNYC wrote: Sun Mar 17, 2019 8:05 pm
FiveK wrote: Sun Mar 17, 2019 4:08 pm Or you can say that if NIIT income is 10% of overall income, then 10% of the state tax (up to $10K) allowed by subtitle A is subtractable for NIIT purposes, even if one chooses not to itemize. :confused
No, because there is a difference in a deduction amount allowable vs a deduction amount allowed. The amount allowable is the amount permitted by law, whether deducted or not. The amount allowed is the amount actually deducted on the tax return (and not later reduced by IRS audit). So if the standard deduction is taken, zero state taxes are deducted on the tax return, thus zero "allowed".
Thanks for that perspective. The allowed/allowable distinction is clearly addressed in Basis adjustment for depreciation allowed or allowable.

By analogy, one could assume it applies not only to depreciation but also to itemized deductions. Is there something in the tax code that would turn the analogy assumption into a black and white definition?

Any chance you can also translate "For purposes of this subtitle, the determination of whether a deduction is allowable under this chapter shall be made without regard to the preceding sentence" (see post viewtopic.php?p=4439433#p4439433)?
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Re: Net Investment Income Tax and SALT deduction cap

Post by Thesaints »

Gents,
We can debate what the definition of “is” is ad nauseam.
Clearly laws are written by humans who have a certain intent and not randomly, or just because.
I’m asking again, what would be the rationale behind allowing to deduct state tax paid from the niit amount only in case the tax payer itemizes deductions (and itemizes using state income taxes, as opposed to sales taxes) ?

This is how such matters are settled, from the Supreme Court down to the lowest IRS office.
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Re: Net Investment Income Tax and SALT deduction cap

Post by usaar33 »

Thesaints wrote: Sun Mar 17, 2019 10:07 pm I’m asking again, what would be the rationale behind allowing to deduct state tax paid from the niit amount only in case the tax payer itemizes deductions (and itemizes using state income taxes, as opposed to sales taxes) ?
For the case of why you might deny it in the case of standard deduction, an argument might be that the standard deduction is a trade where the IRS gets a simpler tax form to process/audit in exchange for cutting your taxes. If you elect this simplicity (in exchange for the benefit of lower taxes), they would also want your NIIT to be simple and not deal with complexities like state income tax paid, an allocation method, etc.

(Not saying this is the rationale, but it is one).
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Re: Net Investment Income Tax and SALT deduction cap

Post by MarkNYC »

FiveK wrote: Sun Mar 17, 2019 9:33 pm
MarkNYC wrote: Sun Mar 17, 2019 8:05 pm
FiveK wrote: Sun Mar 17, 2019 4:08 pm Or you can say that if NIIT income is 10% of overall income, then 10% of the state tax (up to $10K) allowed by subtitle A is subtractable for NIIT purposes, even if one chooses not to itemize. :confused
No, because there is a difference in a deduction amount allowable vs a deduction amount allowed. The amount allowable is the amount permitted by law, whether deducted or not. The amount allowed is the amount actually deducted on the tax return (and not later reduced by IRS audit). So if the standard deduction is taken, zero state taxes are deducted on the tax return, thus zero "allowed".
Thanks for that perspective.

Any chance you can also translate "For purposes of this subtitle, the determination of whether a deduction is allowable under this chapter shall be made without regard to the preceding sentence" (see post viewtopic.php?p=4439433#p4439433)?
The language is confusing, but here's my guess: for taxpayers eligible for both the standard deduction and itemized deductions, the standard deduction is the default. Itemized deductions are allowable only if the taxpayer elects to itemize by listing the specific deductions on the tax return. For other taxpayers, no standard deduction is allowable, so itemized deductions are allowable without any specific election.
libralibra
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Re: Net Investment Income Tax and SALT deduction cap

Post by libralibra »

post removed
Last edited by libralibra on Wed May 29, 2019 11:03 pm, edited 1 time in total.
grok87
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Re: Net Investment Income Tax and SALT deduction cap

Post by grok87 »

libralibra wrote: Thu Mar 28, 2019 6:25 pm The latest TT update says it
  • Fixed - Form 8960 line 9b worksheet disregards SALT limitation
https://ttlc.intuit.com/questions/31699 ... x-software
thanks
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grok87
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Re: Net Investment Income Tax and SALT deduction cap

Post by grok87 »

grok87 wrote: Fri Mar 29, 2019 8:19 am
libralibra wrote: Thu Mar 28, 2019 6:25 pm The latest TT update says it
  • Fixed - Form 8960 line 9b worksheet disregards SALT limitation
https://ttlc.intuit.com/questions/31699 ... x-software
thanks
so i found turbotax's post a little confusing. i think they are saying that previously in their software the Form 8960 line 9b worksheet disregarded the SALT limitation and that this was an error. so they have fixed it now. So now Form 8960 line 9b will be calculated WITH the SALT limitation.

it's confusing still to me cause the SALT limitation means that State and local income AND property taxes are limited to $10k. but form 8960 line 9b refers to state INCOME taxes only.

boy what a mess...i'm taking the sales tax deduction....
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Electron
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Re: Net Investment Income Tax and SALT deduction cap

Post by Electron »

grok87 wrote: Sat Mar 30, 2019 7:50 amit's confusing still to me cause the SALT limitation means that State and local income AND property taxes are limited to $10k. but form 8960 line 9b refers to state INCOME taxes only.
Here is a post on the Fairmark forum with a detailed explanation.

https://fairmark.com/forum/topic/net-in ... #post-1940

"You do the allocation based on the total amount paid in 2018 (you can’t include the amount paid in 2019). If this calculation allocates $10,000 or more to your net investment income, then you can deduct the entire $10,000 against NII."

"To put it a different way, you can treat the dollars that are being disallowed by the $10,000 limit as coming first from the dollars that are allocated to income other than NII."
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usaar33
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Re: Net Investment Income Tax and SALT deduction cap

Post by usaar33 »

grok87 wrote: Sat Mar 30, 2019 7:50 am so i found turbotax's post a little confusing. i think they are saying that previously in their software the Form 8960 line 9b worksheet disregarded the SALT limitation and that this was an error. so they have fixed it now. So now Form 8960 line 9b will be calculated WITH the SALT limitation.
Just applied the TT update and my taxes owed went up, so yes, it was the way you described. (I guess TT is on the hook for those who filed earlier..)

The way they are handling it on their "form 8960 wks" to calculate the deduction for investment income is using the formula min(total_taxes_paid_allocable_to_niit, state_income_taxes deducted).
  • total_taxes_paid_allocable_to_niit is the old formula (which is derived from a proroation of schedule A, line 5a if you chose to deduct state income taxes, else 0)
  • SALT deducted on schedule A, line 5e is.
grok87 wrote: Sat Mar 30, 2019 7:50 am boy what a mess...i'm taking the sales tax deduction....
Not sure why you would do that. At least with TT's formula, that'll raise your taxes by a maximum of $380. (3.8% * 10k) by removing the $10k deduction from NIIT.
grok87 wrote: Sat Mar 30, 2019 7:50 am it's confusing still to me cause the SALT limitation means that State and local income AND property taxes are limited to $10k. but form 8960 line 9b refers to state INCOME taxes only.
TurboTax takes the reasonable position that if you pay over $10k in state income taxes, it's as though you never deducted property taxes.
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newacct
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Re: Net Investment Income Tax and SALT deduction cap

Post by newacct »

TurboTax online still doesn't seem to have been fixed for this :(
jaj2276
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Re: Net Investment Income Tax and SALT deduction cap

Post by jaj2276 »

I realize most people have already moved on from 2018 taxes but does anyone have an authoritative answer on this? The reason I ask is because I'm using the H&R Block desktop program and it DOES NOT cap Form 8960 Part II, Line 9b.

After I enter all the data and answer all the interview questions, I like to go through my paper return and understand what each number means and/or how it is calculated. The value for me on Form 8960 Part II, Line 9b (State & Local Income Tax) is $14,704. This value is derived by first dividing Form 8960, Part I, Line 8 (Total Investment Income) by Form 1040 Line 7 (Adjusted Gross Income) yielding 32.8%. The value on Schedule A, Line 5a (State & Local taxes) is then multiplied by this percentage to arrive at $14,704 (you can obviously back in to how much state taxes I paid).

I tried going back through the interview to see if I answered a question that might matter to this specific calculation but I don't see anything that jumps out at me. Through my research on this topic across various message boards, there are three thoughts:

1) The $10k cap should be applied after multiplying the ratio times the state tax paid. I would use $10k instead of $14,704.
2) The $10k cap should be applied to the state tax paid (Schedule A, Line 5a) before multiplying by the ratio. I would use $3,280 instead of $14,704.
3) There isn't a cap because Form 8960 instructions don't specifically mention the SALT cap and the approach as used by H&R Block software is a "reasonable approach."

There was a lot of chatter on this topic early in the year but most discussions simply stopped. Has the IRS said anything more about this?

One other thought I had as I was looking at this number. What would happen if I overpaid (on purpose) my state taxes for 2018 (during 2018). If the H&R Block software approach is correct then I could get more NIIT benefit by overpaying my state taxes. The % stays the same (i.e. Total Investment Income as a percentage of AGI) but the state taxes paid value increases. Furthemore it doesn't seem like there's any way for the following year's Form 8960 to recapture this benefit. Sure, the denominator for next year will increase leading to a decrease of the Total Investment Income / AGI calculation, but it won't reduce it enough to remove the benefit from this year. I even created a spreadsheet that modeled a two-year period where everything was exactly the same (AGI and Total Investment Income) for both years but the first year had a $10k overpayment while the second year did not have the overpayment. In this scenario, the total NIIT paid across two years was less than if I did not make the overpayment.

A final note. I also looked at what happens when itemizing vs. taking the standard deduction. Currently my itemized deductions are greater than standard deduction. I went in and deleted my mortgage interest putting me back below the standard deduction. H&R Block switched me to taking the standard deduction and the 8960 had no value in Part II, Line 9b. H&R Block believes you have to itemize to get the state tax benefit. I then forced it to itemize even though my deductions were less than $24k in this example and the 8960 Part II, Line 9b now had the $14,704 value.
Last edited by jaj2276 on Fri Oct 04, 2019 7:41 pm, edited 1 time in total.
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Cyclesafe
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Re: Net Investment Income Tax and SALT deduction cap

Post by Cyclesafe »

jaj2276 wrote: Thu Oct 03, 2019 9:10 pm A final note. I also looked at the difference between itemizing vs. standard deduction. In my current case, my itemized deductions are greater than standard deduction. I went in and deleted my mortgage interest which put me back below the standard deduction. H&R Block then switched me to standard deduction and the 8960 had no value in Form 8960, Part II, Line 9b. So it believes you have to itemize to get this benefit. I then forced it to itemize even though my standard deductions were less than $24k in this example and the 8960 Part II, Line 9b now had the $14,704 value.
If one takes the standard deduction, TurboTax also leaves Form 8960 line 9b blank. Its current worksheet, even when overridden with 2018 NII, AGI (my ratio is 44.3% for state income tax attributable to NII of $11,971), then applying the lesser of vs the maximum SALT allowed of $10,000, does nothing to Form 8960 line 9b. Obviously I can directly force Form 8960 9b to $10,000 and the amount is deducted from my NII.

I only have SALT deductions to itemize, but when I ticked the itemize box, again, Form 8960 shows nothing.
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Re: Net Investment Income Tax and SALT deduction cap

Post by Cyclesafe »

Intrigued, I played around a bit more with 2018 TT.

Adding $30k of phantom mortgage interest to my capped $10k of SALT by default converts me to itemized and Form 8960 and its worksheet are filled out without forcing. Form 8960 is $10,000, not $11,971.

So, according to TT, only if one itemizes, one can deduct only up to the SALT cap even if state and local income taxes attributable to NII are greater than $10k. This is, therefore, a maximum benefit of $380 per year. Not much, but still a couple of nights out - with lots of drinks - at Applebee's.
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Re: Net Investment Income Tax and SALT deduction cap

Post by boomer_techie »

Cyclesafe wrote: Sat Oct 05, 2019 2:57 pm So, according to TT, only if one itemizes, one can deduct only up to the SALT cap even if state and local income taxes attributable to NII are greater than $10k.
Quite possibly the makers of tax preparation software are taking the most conservative approach on unlitigated issues - they don't want to be on the hook if the IRS decides on a less advantageous interpretation. This does not mean that the software's approach is correct.

When will 2019 TT, HR, etc. be available for folks to find out how the latest software handles this?

(I'm tax gain harvesting and want to go right up to the NIIT threshold. If I can deduct state taxes, then I could harvest more gain. Therefore I need to decide on my approach before the end of the year.)
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mikestorm
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Re: Net Investment Income Tax and SALT deduction cap

Post by mikestorm »

I haven't looked through it, but this just became available the other day:

https://www.irs.gov/pub/irs-dft/i8960--dft.pdf
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Re: Net Investment Income Tax and SALT deduction cap

Post by Cyclesafe »

boomer_techie wrote: Sun Nov 03, 2019 4:43 am When will 2019 TT, HR, etc. be available for folks to find out how the latest software handles this?
For TT the latter half of November.
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Cyclesafe
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Re: Net Investment Income Tax and SALT deduction cap

Post by Cyclesafe »

Cyclesafe wrote: Sat Oct 05, 2019 2:57 pm Intrigued, I played around a bit more with 2018 TT.

Adding $30k of phantom mortgage interest to my capped $10k of SALT by default converts me to itemized and Form 8960 and its worksheet are filled out without forcing. Form 8960 is $10,000, not $11,971.

So, according to TT, only if one itemizes, one can deduct only up to the SALT cap even if state and local income taxes attributable to NII are greater than $10k. This is, therefore, a maximum benefit of $380 per year. Not much, but still a couple of nights out - with lots of drinks - at Applebee's.
I repeated this calculation with 2019 TT. Same result. Form 8960 Part II Line 9b only shows the $10k SALT cap. Since my NII is trumped by Form 8960 Part III, my NIIT is unchanged.

For those who use NII calculated in Form 8960 Part I, there is would be a maximum $10K deduction (in Part II) (only if itemizing deductions), that affords a $380 reduction in NIIT.

I hope this isn't confusing.
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Re: Net Investment Income Tax and SALT deduction cap

Post by fyre4ce »

I’m failing to understand why the standard deduction vs. itemize matters at all for NIIT purposes. They are different parts of the return with different purposes, and I see no logical reasons why limitations in one area have to transfer to the other.

For example, let’s say I paid $10,000 in state income tax and 10% on this is attributable to investment income. I also paid $14,399 in mortgage interest, and because itemized deductions are $1 less than the standard deduction, I take the standard deduction. I’m not allowed to deduct any state income tax against NII? What if I donate $2 to charity and now I itemize $24,401 on Sch A. Now all of the sudden I can deduct the full $1000 against NII? That doesn’t make sense to me. Am I missing something?
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Re: Net Investment Income Tax and SALT deduction cap

Post by CoastalWinds »

fyre4ce wrote: Tue Feb 18, 2020 1:52 pm I’m failing to understand why the standard deduction vs. itemize matters at all for NIIT purposes. They are different parts of the return with different purposes, and I see no logical reasons why limitations in one area have to transfer to the other.

For example, let’s say I paid $10,000 in state income tax and 10% on this is attributable to investment income. I also paid $14,399 in mortgage interest, and because itemized deductions are $1 less than the standard deduction, I take the standard deduction. I’m not allowed to deduct any state income tax against NII? What if I donate $2 to charity and now I itemize $24,401 on Sch A. Now all of the sudden I can deduct the full $1000 against NII? That doesn’t make sense to me. Am I missing something?
This is my exact situation- I paid state income tax but am using the standard deduction. Hoping I can still reduce NII by the state tax paid. Hoping someone can answer...
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