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What can you learn from Philip Seymour Hoffman’s Will?

April 18, 2014

By: John Garrett

Many admire the extraordinary acting talent of Philip Seymour Hoffman who died on February 2, 2014 with an estate estimated at $35 million.

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Posted at 10:07AM on 04/18/2014 by Michael Keenan | Category: Estate and Gift Tax | Permalink

New York makes significant changes to its estate tax law

April 08, 2014

By: Adam H. Brunner, Jakub D. Kucharzyk

The recently enacted 2014–2015 New York State budget has made significant changes to New York’s estate tax law. The new legislation can be considered a "win" for estates valued between $1,000,000 and $2,062,500 (increasing in future years) while those estates valued at slightly above the new exclusion amount now face an estate tax "cliff." With thoughtful, proactive planning these negative consequences can be minimized.

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Posted at 4:05PM on 04/08/2014 by Michael Keenan | Category: Estate and Gift Tax | Permalink

Still considering a voluntary disclosure to the IRS? This may be a good time to do it.

April 01, 2014

By: Kenneth H. Silverberg

Many U.S. taxpayers, especially those who are dual citizens of the U.S. and another country, have not been reporting all their worldwide income to the IRS or filing the required Foreign Bank Account Reports (FBARs). It is increasingly difficult for these individuals to deal with their banking relationships due to the enforcement pressure the U.S. government is applying to non-U.S. financial institutions. It is still possible to take advantage of the IRS Offshore Voluntary Disclosure Program and benefit from the reduced penalties and avoid criminal prosecution while you “regularize” your relationship with the U.S. tax law.

Click here to read the full post »

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Posted at 3:18PM on 04/01/2014 by Whitney Cook | Category: International Tax; Personal Income Tax | Permalink

Extension of time to make portability election for certain estates

March 31, 2014

By: Mary-Benham B. Nygren and Sarah M. Richards

Under the IRS Code, a decedent’s unused exclusion amount can only be transferred to the decedent’s surviving spouse if a Form 706 is filed within nine months of the decedent’s date of death or within an approved extension period. The exclusion amount was $5,000,000 for 2011, $5,120,000 for 2012 and $5,250,000 for 2013.

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Posted at 9:12AM on 03/31/2014 by Whitney Cook | Category: Estate and Gift Tax | Permalink

State income tax on directors’ fees: don’t create personal tax problems for your board members!

March 17, 2014

By: Kenneth H. Silverberg

If your corporation has directors who are residents of states other than your corporate headquarters state, they are probably liable for non-resident personal income tax on their directors’ fees, stock options and other compensation. You should warn them of this potential tax “surprise” before April 15.

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Posted at 9:59AM on 03/17/2014 by Whitney Cook | Category: Business Taxes; Compensation and Benefits; Income Taxes; Personal Income Tax | Permalink

Decanting as a Tool for Trustees

March 06, 2014

By: Sarah T. Connolly

More than twenty states, including New York, Florida and Texas, have enacted statutes which allow a trustee to “decant” the assets of an irrevocable trust to another new, similar trust.

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Posted at 11:47AM on 03/06/2014 by Whitney Cook | Category: Estate and Gift Tax; Personal Wealth | Permalink

Is your estate plan keeping up with your technology?

February 11, 2014

By: Jennifer Collins, Stephanie T. Seiffert, Mary-Benham B. Nygren

We all own digital assets and use online resources to access financial and other accounts. But what happens to those digital assets and online accounts upon your death or incapacity?

Click here to read the full post »

Post A Comment View Comments(0)

Posted at 2:38PM on 02/11/2014 by Whitney Cook | Category: Personal Wealth; Estate and Gift Tax | Permalink

Have You Thought About a Strategic Gifting Plan For 2014?

January 17, 2014

By: Stephanie T. Seiffert and Deborah L. Anderson

In addition to annual exclusion and lifetime exemption gifts, your strategic gift plan can also include the direct payment of tuition and medical expenses.

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Posted at 10:21AM on 01/17/2014 by Mary-Benham Nygren | Category: Estate and Gift Tax; Personal Wealth | Permalink

IRS Final Section 1411 Regulations Help Real Estate Professionals

January 03, 2014

By: Christian McBurney and Elena Poleganova

In preparation for the coming tax season, the IRS has released the final regulations (and some new proposed ones) under new Section 1411. Section 1411 was introduced effective January 1, 2013 in an effort by the government to shore up the Medicare Trust Fund. It imposes on individuals, estates and certain trusts a new 3.8% Medicare contribution tax on net investment income over certain threshold amounts. The final regulations address some of the concerns raised by taxpayers with the IRS about the proposed regulations. The most significant difference relates to the new safe harbor for rental real estate activities.

Click here to read the full post »

Post A Comment View Comments(0)

Posted at 10:15AM on 01/03/2014 by Whitney Cook | Category: Estate and Gift Tax; Personal Income Tax; Health Care | Permalink

THE 3.8% MEDICARE SURTAX

December 19, 2013

By: Christopher Caldwell, Michael Tullio, Mary Paul, Mary-Benham Nygren

The IRS recently released its final regulations on the “Net Investment Income Tax” for Individuals, Estates and Trusts, officially called “NIIT” by the IRS, but most often referred to as the 3.8% Medicare surtax.

Click here to read the full post »

Post A Comment View Comments(0)

Posted at 4:48PM on 12/19/2013 by Whitney Cook | Category: Estate and Gift Tax; Personal Income Tax | Permalink

 
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What can you learn from Philip Seymour Hoffman’s Will?

Many admire the extraordinary acting talent of Philip Seymour Hoffman who died on February 2, 2014 with an estate estimated at $35 million. Hoffman was survived by Mimi O’Donnell, his companion of many years and their children Cooper (2003), Tallulah (2006) and Willa (2008).

Plan Ahead

By executing a Will in October 2004, Hoffman took the opportunity to decide who would benefit from his estate, namely O’Donnell as the primary beneficiary. Absent a Will, because Hoffman and O’Donnell were not married, none of his estate would have passed to her under New York’s intestacy laws. If O’Donnell disclaimed (or renounced) any part of the bequest to her, it would pass to a trust for their son, Cooper.

Plan for Change

While Hoffman’s 2004 Will designated who he wanted to receive his assets as of the time of its execution, it did not contemplate changes in circumstances, including the addition of his two children born after 2004. For example, the disclaimer trust, if funded, was only for Cooper alone, and not future born children. Providing flexibility within your estate plan or updating your estate plan as your personal circumstances change is a good lesson to learn from Hoffman’s Will.

Plan for Taxes

Hoffman’s estate plan also did not incorporate methods to reduce the tax ramifications of his death. Hoffman’s $35 million estate could generate close to $15 million of federal and New York estate tax. The $20 million O’Donnell will receive after tax could be subject to further estate tax when she dies. With proper tax planning, Hoffman’s assets could have passed to a trust for O’Donnell’s benefit and avoid inclusion of the trust assets in her estate for estate tax purposes (and could have provided O’Donnell protection from creditors and ensured that Hoffman’s assets would ultimately benefit his children).

Plan for Privacy

Hoffman was a private person. Yet, his Will (which became public record once filed for probate) makes the details of the disposition of his assets available to all. The use of a revocable trust, which is not filed in a public record, would have allowed Hoffman’s wishes to remain as private as he was.

New York makes significant changes to its estate tax law

The recently enacted 2014-2015 New York State budget has made significant changes to New York’s estate tax law. The new legislation can be considered a “win” for estates valued between $1,000,000 and $2,062,500 (increasing in future years), because they will no longer owe New York estate tax as a result of incremental increases in the estate tax exclusion amount. Large estates (those valued at significantly above the exclusion amount) will see no change to their effective tax rate, but estates valued at slightly above the exclusion amount now face an estate tax “cliff.” The new legislation also increases the tax base on which the estate tax is calculated by including certain lifetime gifts made by a decedent.

As a result of these changes, certain estates may face a significantly higher estate tax burden, but with thoughtful, proactive planning these negative consequences can be minimized.

Increase in New York estate tax exclusion amount (for some estates)

Perhaps the most drastic change is the increase in the amount excluded from New York estate tax, meaning fewer estates will be subjected to the tax. Prior to the passage of the budget, the New York estate tax exclusion amount had been stagnant at $1,000,000 for over a decade. Under the new legislation, the exclusion amount will increase over the next several years and ultimately align with the federal estate tax exemption in 2019. The exclusion amount is scheduled to increase as follows:

Date of Death         Exclusion Amount
 April 1, 2014 through March 31, 2015 $2,062,500
 April 1, 2015 through March 31, 2016  $3,125,000
 April 1, 2016 through March 31, 2017  $4,187,500
 April 1, 2017 through December 31, 2018  $5,250,000


After January 1, 2019, the New York estate tax exclusion amount is designed to mirror the federal exclusion amount for federal estate tax, which, at such time, is projected to be around $5,900,000.

The estate tax “cliff” and loss of exclusion

While many estates will benefit from the increased exclusion amount, larger estates will not. This is because the exclusion amount is phased out for estates with values between 100% and 105% of the exclusion amount and estates valued over 105% of the exclusion amount will not benefit from any exclusion. Those larger estates will be taxed on the full value of the estate, creating an estate tax “cliff” whereby a relatively small increase in the size of an estate can trigger significant New York estate tax.

For example, as evidenced by the table below, an increase in estate assets of merely $110,000 (from $2,060,000 to $2,170,000), would trigger a New York estate tax of $112,400.

 Date of Death    Estate Size    Tax
  (Current Law)
 Tax
  (Prior Law
)
 March 1, 2015     $2,060,000  $0  $104,200
 March 1, 2015  $2,170,000  $112,400  $112,400
 March 1, 2015  $5,000,000  $391,600  $391,600

Certain gifts will be included for estate tax purposes

Taxable gifts made by a New York resident between April 1, 2014 and December 31, 2018 will now be taken into account for determining a decedent’s New York estate tax if the gift was made within three years of death. In effect, this reinstates a tax on certain gifts in New York, although no tax would be payable until the time of the donor’s death.

Estate tax changes for non-residents

New York has traditionally imposed an estate tax on any real property or tangible personal property located in New York which is owned by a non-resident at death. Under the new legislation, New York expands the types of assets owned by a non-resident on which it imposes the estate tax, now also including:

  • the value of gifts of property located in New York; and
  • intangible personal property (such as bank accounts) employed in a trade, business or profession carried on within New York.

What remains the same?

As enacted, the legislation maintains the estate top tax rate of 16% until March 31, 2015. The legislature will have the opportunity again next year to determine the top estate tax rate for decedents dying after March 31, 2015.

For federal purposes, any unused estate tax exclusion may pass to the surviving spouse. This concept, often referred to as “portability,” has not been adopted in New York.

Looking to the future

The increased exclusion amount is a welcome relief for estates between $1,000,000 and the new New York exclusion amount, as they will no longer be subject to New York estate tax.

Individuals with wills or revocable trusts that fund a “credit shelter trust” with an amount equal to the New York estate tax exclusion may want to review their plan. The new legislation increases the funding amount of such trusts and decreases (or possibly eliminates) the amount available to fulfill bequests to other trusts, family members or charitable organizations.

In addition, the phase out of the estate tax exclusion for larger estates makes it beneficial to reduce the size of one’s estate prior to death to avoid the potential New York estate tax “cliff.” The potential inclusion of lifetime gifts made prior to January 1, 2020 in a decedent’s New York taxable estate further complicates the options for reducing the size of an estate, but careful planning can help avoid the potential pitfalls in the new legislation.

Our Private Clients attorneys can help you craft an appropriate course of action based on your assets and estate planning goals to address the recent New York estate tax law changes.

 
Still considering a voluntary disclosure to the IRS? This may be a good time to do it.
By Kenneth H. Silverberg
 
Many U.S. taxpayers, especially those who are dual citizens of the U.S. and another country, have not been reporting all their worldwide income to the IRS or filing the required Foreign Bank Account Reports (FBARs). It is increasingly difficult for these individuals to deal with their banking relationships due to the enforcement pressure the U.S. government is applying to non-U.S. financial institutions.
 
It is still possible to take advantage of the IRS Offshore Voluntary Disclosure Program and benefit from the reduced penalties and avoid criminal prosecution while you “regularize” your relationship with the U.S. tax law.
 
Full article is available on nixonpeabody.com here
 
For more information on the content of this alert,
contact your Nixon Peabody attorney or:
 
Kenneth H. Silverberg, 202-585-8322, ksilverberg@nixonpeabody.com
 
Thomas M. Farace, 585-263-1440, tfarace@nixonpeabody.com
Extension of time to make portability election for certain estates
By Mary-Benham B. Nygren and Sarah M. Richards
 
Under the IRS Code, a decedent’s unused exclusion amount can only be transferred to the decedent’s surviving spouse if a Form 706 is filed within nine months of the decedent’s date of death or within an approved extension period.  The exclusion amount was $5,000,000 for 2011, $5,120,000 for 2012 and $5,250,000 for 2013. 
 
The recent Revenue Procedure 2014-18 provides that an executor estate may apply for an extension of the deadline to make a portability election if the decedent:
 
a) had a surviving spouse;
b) died between December 31, 2010 and December 31, 2013;
c) was a United States citizen or resident;
d) was not required to file a return based on the value of the gross estate and adjusted taxable gifts;
e) failed to file an estate tax return within the time required by the temporary portability regulations;
f) indicates on the Form 706 that it is filed pursuant to Revenue Procedure 2014–18 to elect portability under §2010(c)(5)(A); and
g) files the Form 706 before December 31, 2014.
 
If the above requirements are met, the IRS will consider the election timely and an estate tax closing letter acknowledging receipt of Form 706 will be issued.
 
This Revenue Procedure acknowledges United States v. Windsor, which found the terms spouse, husband and wife included persons of the same sex who are married to each other and noted Revenue Ruling 2013-17, which provided that the Windsor holding will apply prospectively as of September 16, 2013. Accordingly, if the above requirements are met and the decedent had a same-sex surviving spouse, then the executor can apply for an extension of portability as well.
 
State income tax on directors’ fees: don’t create personal tax problems for your board members!
By Kenneth H. Silverberg
 
If your corporation has directors who are residents of states other than your corporate headquarters state, they are probably liable for non-resident personal income tax on their directors’ fees, stock options and other compensation. You should warn them of this potential tax “surprise” before April 15.
 
Full article on nixonpeabody.com here
 
For more information on the content of this alert,
contact your Nixon Peabody attorney or:
Kenneth H. Silverberg, 202-585-8322, ksilverberg@nixonpeabody.com
Decanting as a Tool for Trustees
By Sarah T. Connolly
 
More than twenty states, including New York, Florida and Texas, have enacted statutes which allow a trustee to “decant” the assets of an irrevocable trust to another new, similar trust.  In Massachusetts, trustees recently gained the ability to decant through a Supreme Judicial Court decision, Morse v. Kraft, 466 Mass. 92 (2013).
 
The power to decant can be a useful tool for a trustee because it permits the trustee to create a new trust instrument which better conforms to changing circumstances.  The trustee may decant in order to change the standards for or timing of distributions to beneficiaries, to update trustee provisions, to assist in estate or income tax planning for the beneficiaries or to modernize the trust’s administrative provisions.
 
In the Kraft case, the Kraft family (owners of the New England Patriots) wished to change the terms of an irrevocable trust to permit each Kraft son to serve as the sole trustee of his own share of the trust instead of requiring the son to serve with an independent co-trustee.  In order to avoid negative estate tax consequences for the sons, however, it was necessary to place certain restrictions on the son’s ability to distribute to himself.  The family also wished to update the administrative provisions of the trust.
 
In the Kraft case, the Court permitted the trustee to decant the trust to a new trust with the desired provisions because the original trust permitted distributions to be made “to or for the benefit of” the beneficiaries.  The Court reasoned that if a principal distribution could be made “for the benefit of” a beneficiary, then there was evidence of the settlor’s intent to permit the trust to be decanted to another trust for the benefit of that beneficiary.
 
The Court also held that the grandfathered nature of the trust for GST tax purposes would also continue after the decanting was complete.
 
As a result of the Kraft case, Massachusetts trustees now have the ability to decant irrevocable trusts into new irrevocable trusts for the same beneficiary, as long as the original trust allows for distributions “for the benefit of” the beneficiary.  Without that language, it is uncertain as to whether an irrevocable Massachusetts trust may be decanted.  Of course, a trustee may only decant a trust in ways that are consistent with his or her fiduciary duties.
 
The Kraft case creates an excellent opportunity for Massachusetts trustees to review their irrevocable trusts to determine whether it is appropriate to decant into new trusts with provisions more favorable to their beneficiaries.
Is your estate plan keeping up with your technology?
 
We all own digital assets and use online resources to access financial and other accounts. But what happens to those digital assets and online accounts upon your death or incapacity?
 
 
For more information on the content of this alert,contact your Nixon Peabody attorney or:
 
Jennifer Collins, 617-345-6074, jcollins@nixonpeabody.com
Stephanie T. Seiffert, 585-263-1058, sseiffert@nixonpeabody.com
Have You Thought About a Strategic Gifting Plan For 2014?
 
For 2014, each individual has an annual gift tax exclusion of $14,000, per person. This means that you can give $14,000 to each of your children and grandchildren, for example, and pay no gift tax.  If you are married, it is possible to combine gifts with your spouse so that each person can receive $28,000.

The federal lifetime gift tax exemption amount is completely different from and in addition to the annual gift tax exclusion amount.  For 2014, the federal lifetime gift tax exemption amount is $5,340,000.  This means that over the course of your lifetime, you can gift up to the lifetime gift tax exemption amount without paying any gift tax.  As a reminder, gifting within the limits of the annual gift tax exclusion does not utilize any of your lifetime federal gift tax exemption amount. 

Many individuals and couples want to help their children and grandchildren pay for college or other post-secondary education expenses.  What could be better than using the annual gift tax exclusion to defray the costs of college?  Making the payment to the college or other educational institution directly—it is tax free and is in addition to the annual gift tax exclusion.  There are two main rules:
  1. The payment (gift) can be of any amount, as long as it is only for tuition.  Payments for room and board or books are not tax-free, but you can use the annual gift tax exclusion for these purposes.
  2. The gift must be made directly to the educational institution and not to the child or grandchild attending school.
When considering how to contribute to the costs of college in a tax efficient manner, another option is to make gifts to 529 plan accounts for the benefit of college bound children.  Unlike the direct gifting method described above, distributions from 529 plans can be made for the costs associated with going to college such as room and board and textbooks. While it is possible to make tax free gifts to 529 plan accounts in an amount up to the annual gift tax exclusion each year, a unique aspect of these plans is that it is possible to fund them “up front” with five years of contributions between $14,000 and $70,000 (double for a married couple). If you fund with five years of contributions, they will be treated, for gift tax purposes, as being made in five equal installments over a five year time period.  Many parents and grandparents like this option as it is a way of transferring large sums out of their estates and into savings accounts for college.

Direct payment of medical expenses or direct payment of medical insurance premiums are another way to assist family members.  Similar to payment of college expenses, these payments are in addition to the annual gift tax exclusion and lifetime gift exemption.  In order to qualify you must pay the bill directly to the service provider.  As long as the payments are made directly to the doctor, dentist, hospital, medical insurance provider or other medical facility that provided the care or the insurance company that provided coverage, you will not be deemed to have made a “gift” for gift tax purposes.
 
Should you have any questions as you think about making gifts over the next year, please do not hesitate to contact your advisors at NP.

 
IRS Final Section 1411 Regulations Help Real Estate Professionals
By Christian McBurney and Elena Poleganova
 
In preparation for the coming tax season, the IRS has released the final regulations (and some new proposed ones) under new Section 1411. Section 1411 was introduced effective January 1, 2013 in an effort by the government to shore up the Medicare Trust Fund. It imposes on individuals, estates and certain trusts a new 3.8% Medicare contribution tax on net investment income over certain threshold amounts. The final regulations address some of the concerns raised by taxpayers with the IRS about the proposed regulations. The most significant difference relates to the new safe harbor for rental real estate activities.
 
One of the groups of tax payers who will be affected the most by the new Section 1411 tax are individuals who derive income from real estate rentals. The definition of net investment income includes real estate rental income. Although rental income is generally considered net investment income, there is an exception to this general rule for rental income earned in the ordinary course of a trade or business. Under the proposed regulations to Section 1411 this created a conundrum because, under Code Section 469, all rental real estate activities are presumed to be passive by default and therefore would be considered net investment income. In certain situations, however, the presumption that a rental activity is passive can be overcome by the taxpayer qualifying as a “real estate professional” under the test in Section 469(c)(7). In the preamble to the proposed regulations, it is not enough for a taxpayer to qualify as a real estate professional and materially participate in the rental activity or activities in order to be exempt from the Medicare tax. In addition, a third test had to be met: the rental income had to be earned in the ordinary course of a trade or business.
 
The final regulations introduce a new safe harbor for real estate professionals. This safe harbor provides that if a real estate professional participates in a rental real estate activity for more than 500 hours per year – or for more than 500 hours in five of the last ten years – then the rental income associated with that activity will be presumed to be derived in the ordinary course of a trade or business. Additionally, under the final regulations, any election made under Treasury Regulation Section 1.469-9 to aggregate all of a taxpayer’s rental activities will be respected for purposes of this 500 hour test. This election greatly expands the reach of the safe-harbor.
 
The final regulations do not provide any additional guidance on what amounts to a trade or business for purposes of qualifying as a real estate professional. Thus, a taxpayer must look to judicial precedent and administrative rulings for guidance on reaching a conclusion. In general, in order for a rental activity to rise to the level of a trade or business, the taxpayer’s involvement in the activity must be regular, continuous, and substantial. But there are countless factors that come into play in determining whether a rental activity rises to the level of a trade or business, such as the type of property, the number of properties rented, the day-to-day involvement of the owner, and the type of lease, to name a few.
 
The preamble to the final regulations acknowledges that in certain circumstances the rental of a single property may rise to the level of regular and continuous involvement, which could qualify the activity as a trade or a business under Section 162. However, such rental of a single property would not rise to the level of a trade or business in every case as a matter of law. Where the new safe harbor is not met, in order for the net rental income to escape the 3.8% Medicare tax each individual’s fact pattern must be examined to determine if it qualifies as a trade or business.
 
THE 3.8% MEDICARE SURTAX 
By Christopher Caldwell, Michael Tullio, Mary Paul, Mary-Benham Nygren
 
The IRS recently released its final regulations on the “Net Investment Income Tax” for Individuals, Estates and Trusts, officially called “NIIT” by the IRS, but most often referred to as the 3.8% Medicare surtax.

WHAT IS TAXED UNDER THE NEW 3.8% MEDICARE SURTAX?

The 3.8% Medicare surtax is assessed on net investment income received by a taxpayer, and includes interest, dividends, annuities, capital gains, royalties, and rents as well as income from passive activities. Certain exceptions apply to rents derived in the ordinary course of a trade or business and gains attributable to the disposition of property held in a trade or business to which the 3.8% Medicare surtax doesn’t apply. 

Specifically excluded from net investment income for purposes of the Medicare surtax are salary, wages or bonuses, distributions from IRAs or other qualified plans, any income taken into account for self-employment tax purposes, gain on the sale of an active interest in a partnership or S Corporation, and income otherwise excluded or exempt from income under the tax law such as tax-exempt bond interest, capital gains on the sale of one’s primary residence excluded by Internal Revenue Code (IRC) Section 121 and veteran benefits.  

The 3.8% Medicare surtax is assessed on net investment income earned by taxpayers whose tax years begin on or after January 1, 2013.
 
WHO IS TAXED UNDER THE NEW 3.8% MEDICARE SURTAX?
For tax years beginning after December 31, 2012, individual taxpayers with Modified Adjusted Gross Income (“MAGI”) exceeding the following threshold amounts may be subject to the 3.8% Medicare surtax.  It is important to note that the threshold amounts are not indexed for inflation, so the number of taxpayers subject to the Medicare surtax will likely increase in subsequent years.
 
Single Taxpayers                              $200,000
Married Filing Jointly                          $250,000
Married Filing Separately                   $125,000
Head of Household                            $200,000
           
The Medicare surtax is assessed on the smaller of the taxpayer’s net investment income or the excess of the taxpayer’s MAGI over the applicable threshold amount.  MAGI for purposes of the Medicare surtax is comprised of a taxpayer’s Adjusted Gross Income (AGI) plus any amount excluded as foreign earned income under IRC Section 911(a)(1).

For Trusts and Estates, the 3.8% surtax will apply to the lesser of undistributed Net Investment Income or the excess of AGI (as defined in IRC Section 67(e)) over the dollar amount at which the highest income tax bracket applicable to an Estate or Trust begins.  For 2013, this amount is $11,950.
 
Trusts which are required to distribute 100% of net income to beneficiaries will generally pay this tax only on net capital gains realized during the year. Any potential surtax liability related to distributable net income earned by the trust will be determined at the beneficiaries’ tax level when they include their allocable share of the Trust’s income with other income on their returns in determining if the 3.8% Medicare surtax applies.

Discretionary income Trusts and Estates with AGI exceeding $11,950 may have the opportunity to reduce or eliminate the 3.8% Medicare surtax liability if their beneficiaries have MAGI below the applicable threshold amounts.   In these instances, a Trust or Estate having net investment income subject to the Medicare surtax could elect to distribute income to a beneficiary with MAGI below the applicable individual threshold level, thereby effectively removing the net investment income from the reach of the Medicare surtax at both the Trust and individual income tax levels. The income distribution must occur during the tax year or within 65 days of the close of the tax year to qualify as a distribution within the tax year. 

Whether an individual, Estate or Trust, the taxpayer may reduce gross investment income by investment related expenses to arrive at the net investment income subject to the surtax.  Investment related expenses include investment interest expense, investment management fees and state and local income taxes.
 
                                * * * * * *
To ensure compliance with IRS requirements, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

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Postings on this site are intended as a general source of information for clients and friends of Nixon Peabody LLP. The content should not be construed as legal advice, and readers should not act upon anything posted here without professional counsel. This material may be considered advertising under the rules of professional conduct of certain states or countries. To ensure compliance with IRS requirements, we inform you that any discussion of U.S. federal taxation provided here (including any attachment or link) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter. Copyright © 2013 Nixon Peabody LLP. All rights reserved.   Terms of Use

 
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