Alert for Trustees of Trusts with Investments

Application of 3.8% Net Investment Income Tax to Trust Income for 2013
The Affordable Care Act instituted a new 3.8% Net Investment Income Tax on the following types of income:
Interest
Dividends
Capital Gains
Passive Income (rental, partnerships, etc.)

For individual taxpayers, the net investment income tax threshold is $250,000 of AGI. For estates and trusts, the threshold is $11,950. Thus, for every trust with trust taxable income over $11,950, the trust will have to pay an additional 3.8% tax, to the extent there is net investment income reported on the 2013 Form 1041 in excess of $11,950.

There is a way to prevent or reduce this new tax. Trusts can reduce their taxable income by making distributions to the beneficiaries. In addition, trusts may include distributions to beneficiaries made within 65 days after the end of their reporting year. There is still time until Thursday March 6, 2014 to make a distribution to beneficiaries and eliminate the net investment income tax that would otherwise be payable by the trust.

If you think this may apply to a trust in which you are either a trustee or a beneficiary, please call us. We would be happy to help you determine how best to solve this problem.

David P. Dillwood, Partner, CPA