New taxes created by the big federal health tax laws could hit some high-income annuity and trust users starting in 2013.
The Internal Revenue Service (IRS) has given more information about how it expects to handle the taxes in three new batches of documents:
- Draft “net investment income tax” regulations (Internal Revenue Code (IRC) Section 1411).
- Draft “additional Medicare tax” (IRC Section 3101(b)(2)).
- A set of answers to frequently asked questions (FAQs) relating to the net investment income tax.
The proposed regulations and the FAQ answers relate to provisions of the Patient Protection and Affordable Care Act of 2010 (PPACA) and PPACA’s sister, the Health Care and Education Reconciliation Act of 2010 (HCERA).
Congress enacted HCERA to make last-minute changes to PPACA.
The Obama administration refers to the two-bill package that includes PPACA and HCERA as the Affordable Care Act (ACA).
In the Section 1411 draft regulations and the FAQ answers, IRS officials refer to life insurance policies; 401(k) plans, 457 plans and other retirement plans that qualify for special treatment under the Employee Retirement Income Security Act (ERISA); non-qualified deferred compensation plans; and estates and trusts.
In the additional Medicare tax draft regulations, officials refer briefly to non-qualified deferred comp plans.
The IRS released the documents Friday. The Federal Register is set to publish the proposed regulations Wednesday.
Comments for the net investment income tax proposals will be due 90 days after the official Federal Register publication date, and comments on the additional Medicare tax draft will be due 60 days after the publication date.
The net investment income tax
The net investment income tax proposals implement Section 1402 of HCERA, which created IRC Section 1411.
IRC Section 1411 is supposed to impose a 3.8 percent tax on the unearned income of high-income taxpayers starting Jan. 1, 2013.
The tax, which is supposed to raise more than $210 billion over 10 years, will affect individual filers who earn more than $200,000 in adjusted gross income (AGI) and couples with an AGI over $250,000.
The income subject to the tax will include investment income from non-qualified annuities as well as income from interest, dividends and capital gains, IRS officials said in the FAQ answers.
Types of income not subject to the tax will include Social Security benefits income; distributions from qualified plans such as 401(a) plans, 403(a) plans, 403(b) plans, 408 plans and 457(b) plans; and unemployment compensation.