Tax & Accounting Blog

Net Investment Income Tax: IRS Website FAQs Can Help Answer Some Questions

ONESOURCE, Tax Information Reporting, Trust Tax April 3, 2013

The Net Investment Income Tax (NIIT), the new 3.8% tax on certain net investment income of individuals, estates and trusts that have income above threshold amounts, is now in effect.

The IRS has posted a list of FAQs, which can help answer some client questions about the NIIT, at Tax counsel advice should be sought as to how the rules will impact 2013 tax liabilities of both the trust or estate and the beneficiaries.

The Net Investment Income Tax took effect on January 1, 2013, applicable to individuals, estates and trusts for their first tax year beginning on or after Jan. 1, 2013. It does not affect income tax returns for the 2012 taxable year. Trusts and estates are impacted because the NIIT applies on the lesser of undistributed net investment income for the tax year, or the excess of the entity’s adjusted gross income over the dollar amount at which the highest tax bracket for estates and trusts begins for the tax year.

There are exemptions, such as for tax-exempt interest and tax-exempt dividends from a mutual fund; for distributions from most qualified retirement plans including IRAs (but distributions enter into the AGI calculation); an exception for trusts where all of the unexpired interests are devoted to one or more of the charitable purposes described in IRC § 170(c)(2)(B); and special computational rules for charitable remainder trusts and electing small business trusts (regulations have been proposed and may be relied upon until final regulations are issued). For grantor trusts, the individual grantor’s tax return will be impacted.