The IRS has released final 2013 Form 8960, Net Investment Income Tax-Individuals, Estates, and Trusts, just in time for the 2014 tax filing season. Many taxpayers have complained that calculating the 3.8 percent net investment income (NII) tax for 2013, the first tax year that it applies, remains challenging in many situations. Nettlesome issues remain with respect to how the NII tax applies to rental income, passthrough entities, and trust distributions, among other circumstances. Nevertheless, individuals, trusts and estates that file for 2013 (either on Form 1040 or 1041, respectively) are required to file Form 8960 if a threshold amount of regular income is exceeded and investment income has been earned.
Like draft Form 8960 that was released in August 2013, final 2013 Form 8960 contains only 21 lines, all of which continue to fit onto a single-sided page. Line descriptions and directions continue to be supplemented by 18 parenthetical directives, “see instructions.” Taking a “subtraction” approach, the form assumes that investment income includes all business income and net gain or loss except various items backed out using decidedly complicated worksheets in lengthy instructions.
Some flexibility in applying the rules. The IRS has said that taxpayers can apply either the final regulations (released in late November 2013) or the proposed regulations (released in December 2012) for 2013, the first year that the NII tax is effective. The final regulations are generally always more taxpayer-friendly, at least one IRS official has admitted. However, taxpayers can also “chart their own course” and not necessarily apply either set of regulations; but taxpayers must be careful not to duplicate items of income or loss, the same official commented. It remains to be seen how flexible the IRS will be in its interpretation of what the regulations require, if and when 2013 returns are eventually audited for the NII tax.
Special circumstance for trusts and estates. Calendar-year taxpayers, including trusts and estates, will have to deal with the 3.8-percent tax on net investment income (NII) for the first time as they file their 2013 tax returns. The undistributed NII of an estate or trust becomes subject to the 3.8-percent surtax when its adjusted gross income (AGI) exceeds the threshold of $11,950 for tax year 2013 or $12,150 for tax year 2014. This is a fairly low amount, especially in contrast to the $200,000 or $250,000 adjusted gross income thresholds for NII to which individuals, including pass-through beneficiaries of an estate or trust are subject.
It is also important to remember that the NII tax applies at two different levels: First, at the level of the trust or estate itself. The AGI threshold at which the estate has to start worrying about the tax is fairly low, but there is also the second level, which involves the extent to which the trust distributes NII amounts to beneficiaries.
For more information, please contact your Brown Smith Wallace Tax Advisor, or Cathy Goldsticker, at 314.983.1274 or firstname.lastname@example.org.