Posts Categorized: Tax Update

The New 3.8% Surtax on Investment Income

 

Author: 

 

The Health Care and Education Reconciliation Act of 2010, signed into law by President Obama on March 30, 2010, created a 3.8 percent surtax on certain net investment income.  The application of the surtax began on January 1, 2013. 

Net Investment Income (NII) is defined as: 

(1)   gross income from interest, dividends, annuities, royalties, rents, substitute interest payments and substitute dividend payments unless such income is derived in the ordinary course of a trade or business that is neither a passive activity with regard to the taxpayer nor a financial instrument or commodities business; 

(2)   other gross income derived from a trade or business that is either a passive activity with respect to the taxpayer or a financial instrument or commodities business; and 

(3)   net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property except to the extent the gain is from the sale of property held in an active trade or business other than a financial instrument or commodities business. 

Self-employment income, active trade or business income, gain on the sale of an active interest in a partnership or S-Corp, IRA or qualified plan distributions, trusts for charity (except CLTs) and non-resident alien’s income are all excluded from NII. 

Application of the Tax on Individuals 

The 3.8 percent tax applies to all individuals who have adjusted gross incomes over the threshold amounts and receive net investment income as defined in the Act (see above).  The amount subject to the surtax will be the lesser of (1) the net investment income; or (2) the amount of the taxpayer’s adjusted gross income that exceeds an applicable threshold amount.  The threshold amount for a single taxpayer is $200,000.  The threshold amount for a married taxpayer filing jointly is $250,000 ($125,000 if filing married separate). 

By definition, your adjusted gross income includes wages from work, net investment income, qualified distributions from a retirement plan such as a traditional IRA, 401(k), or 403(b), and any foreign earned income exclusion you may have earned during the tax year. 

How Does the Tax Affect Trusts & Estates? 

The general rule is that the surtax applies to all trusts and estates described in Subtitle A, Chapter J, Part 1 (IRC §§ 641 – 685) that earn income over the threshold amount.  That amount is $11,950 for 2013.  There are however, the following exceptions: 

1.     A trust under which all the unexpired interests are devoted to one or more of the charitable purposes described in IRC § 170(c)(2)(B); 

2.     A grantor trust or § 678 trust; 

a.     Since income in a grantor trust or a § 678 trust is reported on an individual’s income tax returns, the NII will be added to the individual’s 1040 and the surtax will be calculated according to the rules for individuals; 

3.     A trust exempt from tax under IRC § 501(c); 

4.     A charitable remainder trust; 

5.     Most foreign trusts; 

a.     The Treasury Department has indicated that they will take the position that NII accumulated in a foreign trust for the benefit of a domestic beneficiary should be subject to the surtax; 

6.     Business trusts; 

7.     Common trust funds; and 

8.     Pooled income funds. 

The 3.8 percent tax will be imposed on the lesser of: (1) the total undistributed net investment income for the taxable year; or (2) the excess of the entity’s AGI for the taxable year over the highest trust and estate tax bracket ($11,950 for 2013). 

The surtax will not affect everyone but its effect could be steep. Taxpayers, including trusts and estates, in the highest marginal income tax rate, which is currently 39.6 percent, will pay 43.4 percent with the surtax in 2013.

2013 Inflation-Adjusted Figures

Author:
Nikki Marie Oliveira, Esq., LL.M., Margolis & Bloom, LLP

Rev. Proc. 2012-41 was recently released with the inflation-adjusted items for 2013. 

 

Gift Tax.  The figure that is arguably most important to those of us in the T&E field is the annual gift exclusion amount under § 2503.  This amount has been increased from $13,000 to $14,000.  Practitioners will now be advising clients that gift-splitting is permitted at a rate of $28,000.  We’ll get used to it.  For gifts to a noncitizen spouse under §§ 2503 and 2523(i)(2), the exclusion has risen from $139,000 to $143,000.  Recipients of gifts from certain foreign persons are required to report gifts under § 6039F if the aggregate value of gifts received in a taxable year exceeds $15,102 (the threshold in 2012 was $14,723).
Estate Tax.  For estates of decedents dying in 2013, if the personal representative elects to use the special use valuation method under § 2032A for qualified real property, the aggregate decrease in the value of qualified real property resulting from the election for purposes of the estate tax cannot exceed $1,070,000 (formerly $1,040,000).  The dollar amount used to determine the “2-percent portion” for calculating interest under § 6601(j) of the estate tax extended as provided in § 6166 is $1,430,000 (up from $1,390,000).
Foreign Earned Income Exclusion.  Under § 911(b)(2)(D)(i), this figure is now $97,600 (previously $95,100).
Please note that Rev. Proc. 2012-41 did not address a number of items, including the following: the tax rate tables under § 1; the adoption credit under § 23; the child tax credit under § 24; the Hope Scholarship and Lifetime Learning Credits under §25A; the earned income credit under § 32; the standard deduction under § 63; the overall limitation on itemized deductions under § 68; the qualified transportation fringe benefit under § 132(f); the adoption assistance exclusion under § 137; the personal exemption under §151; the election to expense certain depreciable assets under § 179; the interest on education loans under § 221; and the unified credit against estate tax for estate of decedents under § 2010(c).  We will keep an eye out for future guidance regarding these items and will update you accordingly.

 

Type of Tax

 

Code Section

 

 

2012

 

 

2013

 

 

 

The “Kiddie Tax”

 

 

 

1(g)

 

 

$950

 

 

$1,000

 

 

 

Rehabilitation Expenditures Treated as Separate New Building

 

 

 

42(e)(3)(A)(ii)(II)

 

 

$6,200

 

 

$6,400

 

 

 

Alternative Minimum Tax Exemption for a Child Subject to the “Kiddie Tax”

 

 

 

59(j)

 

 

The exemption may not exceed the sum of (1) the child’s earned income for the taxable year, plus (2) $6,950.

 

 

The exemption may not exceed the sum of (1) the child’s earned income for the taxable year, plus (2) $7,150.

 

 

Private Activity Bonds Volume Cap

 

 

146(d)(1)

 

 

 

 

The amounts used to calculate the State ceiling for the volume cap for private activity bonds is the greater of (1) $95 multiplied by the State population, or (2) $284,560,000.

 

 

The amounts used to calculate the State ceiling for the volume cap for private activity bonds is the greater of (1) $95 multiplied by the State population, or (2) $291,875,000.

 

 

Eligible Long-Term Care Premiums

 

 

213(d)(10)

 

 

 

 

40 or less … $350
41- 50 … $660
51 – 60 … $1,310
61 – 70 … $3,500
More than 70 … $4,370

 

 

40 or less … $360

 

41- 50 … $680
51 – 60 … $1,360
61 – 70 … $3,640
More than 70 … $4,550

 

Expatriation to Avoid Tax

 

 

877

 

 

 

 

An individual with “average annual net income tax” of more than $151,000 for the five taxable years ending before the date of the loss of United States citizenship is a covered expatriate.

 

 

An individual with “average annual net income tax” of more than $155,000 for the five taxable years ending before the date of the loss of United States citizenship is a covered expatriate.

 

 

Tax Responsibilities of Expatriation

 

 

 

877A

 

 

 

 

The amount that would be includible in the gross income of a covered expatriate is reduced (but not below zero) by $651,000.

 

 

The amount that would be includible in the gross income of a covered expatriate is reduced (but not below zero) by $668,000.

 

 

 

Attorney Fee Awards

 

 

 

7430(c)(1)(B)(iii)

 

 

 $180 per hour.

 

 

$190 per hour.

 

 

Periodic Payments Received under Qualified Long-Term Care Insurance Contracts or under Certain Life Insurance Contracts

 

 

 

7702B(d)(4)

 

 

The stated dollar amount of the per diem limitation regarding periodic payments treated as paid by reason of the death of a chronically ill individual is $310.

 

 

The stated dollar amount of the per diem limitation regarding periodic payments treated as paid by reason of the death of a chronically ill individual is $320.