For the first question regarding income taxed at the trust level, that would be the correct treatment - if the trust instrument limits the distributions to Trust Accounting Income as it usually does in a Simple Trust then yes the remaining income would be taxed in the trust. You may want to review the trust instrument and see if there is any flexibility in the way that Trust Accounting Income is calculated.

For the second question regarding state taxes, the 8960 instructions state, "Enter the amount of state, local, or foreign income taxes on Form 8960, line9b, net of any deduction limitations imposed by Section 68." So the limitations do apply in calculating NII.