AICPA Recommends Changes to Proposed Net Investment Income Tax Rules

July 18, 2013

The American Institute of CPAs (AICPA) detailed its recommendations about how to make the new 3.8 percent tax on net investment income (NII) more workable in a letter to the Internal Revenue Service (IRS) on June 17, 2013.

A new tax, effective in 2013 as part of the Affordable Care Act, imposes a tax equal to 3.8 percent of the lesser of an individual’s net investment income for the tax year or any of the excess of the individuals’ modified adjusted gross income over a certain threshold.  The threshold is $250,000 for married taxpayers filing jointly and surviving spouses and $125,000 for married taxpayers filing separately, and $200,000 for other taxpayers.  Estates and trusts are also covered by the new tax with different thresholds.

Proposed regulations (REG-130507-11) were issued in December 2012 by the IRS to establish rules to implement the tax for individuals, trusts and estates.  The proposed rules also defined net investment income and its components, defined covered trades and businesses and outlined how to determine the gain or loss on the disposition of interests in partnerships or S corporations.

The AICPA’s letter made 16 specific recommendations.  Among its recommendations, the AICPA urged the IRS to issue additional guidance to provide more clarity on when income is derived in the ordinary course of a trade or business under section 1411 of the Internal Revenue Code, to provide a safe harbor to reduce taxpayers’ compliance burdens and to allow a simplified method for calculating the tax.

On May 8, 2013, the AICPA sent the IRS and Treasury comments focused specifically on how the new tax affects trusts and estates.  The AICPA said the guidance in the proposed regulations “generally provides a reasonable approach to interpreting, implementing, and complying with the new NII tax rules as applicable to trusts and estates,” but listed eight recommendations for inclusion in the final regulations.

The AICPA is drafting two more comment letters to send to the IRS regarding the net investment income tax.  One letter focuses on international tax issues and the other on partnership tax issues.

For more information about the AICPA’s June 17 letter, see the related Journal of Accountancy article.