Net Investment Income Tax

[MDM]

Still not clear whether one has to have chosen to itemize deductions, or merely that it is those taxes that are itemizable and relate to investment income that may be subtracted on line 9b….

[wanttoknow]

MDM,

The former–“one has to have chosen to itemize deductions”.

[wanttoknow]

KAWill,

Based upon what Kaye Thomas has said, I believe the amount that you start with in allocating state income tax to Net Investment Income for a particular year is simply the total of state income tax payments you have entered on line 5a of Schedule A for that year.

If the resulting allocation is more than $10,000, it must be reduced to $10,000.

There would be only one allocation.

It looks to me like the only way the before-and-after method would be feasible is if the state income tax paid in a particular year = the tax incurred for that year.

[wanttoknow]

On second thought I guess there could be two allocations.

I.e. if state tax paid in 2019 and deducted on Schedule A in 2019 was incurred in 2018, it could be allocated to Net Investment Income based on 2018 income, even though the allocation will be subtracted from 2019 Net Investment Income.

And state tax incurred, paid, and deducted on Schedule A in 2019 would be allocated to Net Investment Income based on 2019 income.

I don’t see anything in the 8960 instructions to prevent that.

And this could work with the before-and-after method.

[wanttoknow]

In my e-mail I received the following message relating to this thread; however, it does not show up in the thread–at least not for me.

Justin wrote:

* * * * * * * * * * * * * *

Hi wanttoknow,

You replied to MDM earlier saying

> The former–“one has to have chosen to itemize deductions”

but I could not find anywhere in the regulations why that is. Do you have a pointer or something you can quote indicating that in fact one cannot rely on itemizable deductions?

Post Link: “https://fairmark.com/forum/topic/net-investment-income-tax-2/page/2/#post-3087

* * * * * * * * * * * * * *
Justin,

I relied on Kaye Thomas’s message #1928 close to the beginning of this thread.

He said:

“The amount you can use in calculating NIIT is limited to ‘deductions allowed by subtitle A’ (see (a)(2) of the reg).” He then goes on to describe what Subtitle A says. The reg. he refers to is 1.1411-4 Definition of net investment income.

In his message #1933 he explains that “In the tax regulations, a reference to subtitle A means the part of the Internal Revenue Code that tells how the income tax works.”

I believe the Code, which is approved by Congress, is different from the regulations which are devised by the I.R.S.

[MDM]

“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 clear enough. But under what circumstances is the first sentence nullified by the second sentence?

In other words, does the second sentence mean the deduction can be taken for the NIIT without regard to whether one elected to itemize for form 1040?

Probably clear to anyone who understands the operative definitions of “this subtitle” and “this chapter”, but otherwise…?

[wanttoknow]

MDM,

I can’t answer your question, but am providing some additional information.

The quoted text comes from Section 63 (e) of the Internal Revenue Code, and the context is as follows:

Title 26 – Internal Revenue Code
Subtitle A – Income Taxes

Chapter 1 – Normal taxes and surtaxes
Subchapter B – Computation of Taxable Income
Part I – Definition of Gross Income, Adjusted Gross Income, Taxable Income, etc.
Section 63 – Taxable Income Defined
Subsection (e) Election to itemize

Chapter 2a – Unearned Income Medicare Contribution – i.e. Net Investment Income Tax

Thus, the translation of the quoted text is:

Unless an individual makes an election under [Subsection (e) – Election to Itemize], no itemized deduction shall be allowed for the taxable year. For purposes of [Subtitle A – Income Taxes], the determination of whether a deduction is allowable under [Chapter 1 – Normal taxes and surtaxes] shall be made without regard to the preceding sentence.

This does seem to be nonsensical in that it is saying that the first sentence, which is part of Chapter 1, does not apply to any tax covered by Chapter 1.

And what about the Net Investment Income Tax (Chapter 2a) ?

Here’s the link:
https://www.law.cornell.edu/uscode/text/26/63

[ag]

The instructions to Form 8960 say the starting point for the allocation of SALT is “State, local, and foreign income taxes if properly deducted on your return when calculating your U.S. regular income tax.” Use of the word “deducted,” rather than “deductible,” seems to suggest the deduction is not available for NIIT if the standard deduction is used. I have found no authority in the Code or Regulations supporting this conclusion. However, since for 2019 the maximum amount of the NIIT tax savings would be $380, I decided I had wasted enough time on this and will not take the deduction. BTW this is the TurboTax program’s approach.

[Lewis-H]

The Net Investment Income Tax is imposed by section 1411 of the Internal Revenue Code. The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates, and trusts that have income above the statutory threshold amounts.

[Author]

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