Distributions from CRTs are Subject to the New Net Investment Income Tax (3.8 % Surtax) Starting in 2013 – Consider harvesting CRT long-term gains and income in calendar year 2012 and defer harvesting CRT losses and expenses until 2013.
On Friday, November 30th 2012, the IRS and Treasury issued proposed regulations regarding the new 3.8% medicare surtax, including on net investment income and the additional medicare (hospital insurance) tax. The IRS also issued FAQs on the net investment income proposed regs. The proposed regulations (REG-130507-11) provide much anticipated guidance under new IRC section 1411, as added by the Health Care and Education Reconciliation Act of 2010, regarding the net investment income tax (NIIT).
Section 1411 imposes a 3.8 percent tax on some net investment income of individuals, estates, and trusts that have income above the statutory threshold amounts (MFJ $250,000, S/HOH $200,000, MFS $125,000, estates and trusts $11,650). The NIIT will start to apply in 2013 (i.e., tax years beginning after Dec. 31, 2012). However, the regs generally are proposed to be effective for 2014 and future tax years (i.e., tax years beginning after December 31, 2013). The special computational rules for charitable remainder trusts (CRTs) are proposed to apply to 2013 and future tax years (i.e., tax years beginning after December 31, 2012). Section 1411 is effective for tax years beginning after December 31, 2012. Taxpayers may rely on the proposed regs for purposes of complying with section 1411 until the effective date of the final regs. Treasury and the IRS intend to finalize regs under section 1411 in 2013.
One aspect of the new proposed regulations and an immediate planning opportunity to consider before 2013 concerns the application of the surtax to charitable remainder trust distributions. According to the new proposed regulations, while CRTs are exempt from the new 3.8% surtax, distributions of post December 31, 2012 net investment income of CRTs will be subject to the 3.8% surtax. Therefore, CRT distributions of income and capital gains realized and recognized before December 31, 2012 will not be subject to the surtax, but CRT distributions of income and capital gains realized and recognized after 2012 will be subject to the new 3.8 % surtax. Accordingly, selling appreciated CRT assets in calendar year 2012 may reduce the amount of the surtax on future CRT distributions. Likewise, deferring the sale of CRT loss assets and the payment of expenses until 2013 may also reduce the tax burden on future CRT distributions.
The AICPA Tax Division will be developing comments on the proposed regulations; the comments are due by March 5, 2013. We will keep you informed.
For more information on the proposed regulation, see the AICPA proposed reg CRT impact summary page. Also, for more resources and tools on the estate tax impact of the medicare tax, see the AICPA estate tax impact of medicare tax page, and 2012 year end planning tools page.