Question: Does the relatively new 3.8% net investment income tax (“NII Tax”) apply to estates and trusts?
Answer: Yes the same 3.8% surtax that applies to individuals (married joint filers whose income exceeds $250,000 or single filers whose income exceeds $200,000) applies to estates and trusts with adjusted gross income over the highest income tax threshold ($12,300 in 2015).
Specifically, the tax is 3.8% multiplied by either the “AGI” over the income tax threshold or the net investment income which remains undistributed (the lesser of the two).
Example: A trust earned $13,150 of income in 2014 ($10,000 of investment income and $3,150 of ordinary income). The 3.8% tax is $38 because it is the lesser of the two [3.8% of $13,150 – $12,150)]. If there is no net investment income then there is no NII tax.
Comment: In order to keep trust and estate income taxes down, it may be prudent to implement tax strategies to push distributions out to the beneficiaries during the tax year. Of course, this may subject the trust beneficiaries to the tax, so it is important to examine the result from both sides.
If you have any questions or would like more information please contact Steve Shane at: firstname.lastname@example.org | 301.575.0313.
ABOUT STEVE SHANE
Steve Shane provides strategic counseling to clients in need of estate administration, charitable giving and business continuity planning while minimizing estate, gift, and generation-skipping transfer tax exposure. He offers legal guidance to clients on asset protection and the proper disposition of assets in accordance with the client’s objectives, while employing tax planning techniques such as the use of irrevocable trusts, life insurance planning, lifetime gifts and charitable trust. He is also experienced with drafting documents for business planning, the incorporation and application for exemption for Private Foundations and the administration of decedents’ estates.
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