New Medicare Tax: planning ideas for estates and trusts.

• Author: Joseph, Donita
• Position: Estateplanning

The Health Care mid Education Reconciliation Art of 2010, commonly called ObamaCare, established a new 3.8 percent Medicare Tax, also known as the Net Investment Income Tax (NIIT) under the new Internal Revenue Code Sec. 1411.

The general rule is that estates and trusts are taxed similar to individuals. But for purposes of the NIIT, the threshold amount for determining how much income is subject to the NIIT is $200,000 for single individuals and $250,000 for married filing joint taxpayers, but only $11,950 for estates and trusts.

Trusts and estates, as well as individuals, will be paying higher taxes beginning in 2013, but because of the low threshold for the NITT, trusts and estates are more likely tit be subject this new tax.

It's been said that income tax, because of the new 3.8 percent XIII on passive investment income, is the new "estate tax" for many clients. Because of this, planning for distributions from trusts and other planning relative to trusts will become even important. In many cases, greater consideration will be given to having a trust characterized as not being passive, but rather, actively participating in an activity to avoid this tax.

In general, Sec. 1411(a)(2) imposes a tax 3.8 percent on estates and trusts on the lesser of their undistributed net investment income or the excess of their adjusted gross income [as defined in See. 67(e)] over the dollar amount at which the highest tax bracket in Sec. 1(e) begins for such taxable year. Proposed Reg. Sec. 1.1411-3 provides special rules for applying Sec. 1411 to estates and trusts.

The NITT applies to must trusts that are subject to income tax, but does not apply tit tax exempt trusts. It is not imposed on grantor trusts because the NIIT will be applied on the grantor's return.

Net investment income includes:

* Taxable interest;

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* Dividends;

* Annuity distributions;

* Rents;

* Royalties;

* Income derived from passive activity, including partnership and S corporation income;

* Net capital gain derived from the disposition of property.

Net investment income does not include:

* Salary, wages or bonuses;

* Social Security income;

* Distributions from IRAs or qualified retirement plans;

* Any income taken into account for self-employment tax purposes;

* Gain on the sale of an active interest in a partnership or S corp; and

* Items that an otherwise excluded or exempt from income under the income tax law, such as interest from tax-exempt bonds, capital...