Written By Attorney Lori A. Curtis
On June 28, 2012, the U.S. Supreme Court ruled that the Obama healthcare law is constitutional. This means that the remaining provisions of the law will be going into effect.
One little known provision is a new 3.8% investment income surtax, also called the health care surtax or the Medicare tax. It will go into effect on January 1, 2013.  This new surtax will be assessed on the lesser of a) net investment income or b) the excess of modified adjusted gross income (MAGI) over the “threshold amount.” For married taxpayers filing jointly, the threshold amount is $250,000; married filing separately, $125,000; all other individual taxpayers, $200,000. For trusts and estates, it is the beginning of the top income tax bracket, which for the year 2012, is $11,650.
Stated another way: 1) If your modified adjusted gross income (MAGI) is less than or equal to the threshold amount that applies to you, you will not pay this tax. 2) If your modified adjusted gross income (MAGI) is greater than the threshold amount that applies to you, you will pay the 3.8% tax on the lesser of a) your net investment income or b) the amount of your MAGI over the threshold amount.
The surtax liability is determined on income before any tax deductions are considered. That means your deductions could put you in the lowest income tax bracket, yet you could still have investment income that is subject to the surtax. Also, the capital gain rate is scheduled to increase for high-income taxpayers to 20% in 2013, so the total tax on capital gains (with the surtax) could be 23.8% in 2013 and beyond.
How does this apply to trust and estate administration? Under general tax rules, trust and estate income is taxed to the trust or estate, or the beneficiaries. If income is accumulated, then the income is taxed to the trust or estate. If the income is distributed, then the trust or estate gets an income tax deduction and the beneficiaries have taxable income they must report.
If you are the personal representative of an estate or the trustee of a trust, we suggest you consult with your legal and accounting professionals to make sure you avoid the potential minefields that are out there.
IRS Circular 230 Disclosure:
To ensure compliance with IRS requirements, note that any U.S. tax advice contained in this communication is not for use for the purpose of (i) avoiding tax related penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax-related matters.
http://www.keeblerandassociates.com. The full text of the Health Care Act is available online at http://www.healthcare.gov/law/full/index.html, with the relevant provisions beginning at Section 1411 at page 946.