PPACA and her sister: IRS posts tax proposals

“Estates and trusts will be subject to the net investment income tax if they have undistributed net investment income and also have adjusted gross income over the dollar amount at which the highest tax bracket for an estate or trust begins for such taxable year,” officials said.

For tax year 2012, the threshold amount is $11,650, officials said.

In the preamble to the net investment income tax draft, officials include a section on treatment of annuities.

“Gain or loss from the sale of an annuity would be treated as net investment income,” officials said. “To the extent the sales price of the annuity does not exceed its surrender value, the gain recognized would be treated as gross income… If the sales price of the annuity exceeds its surrender value, the seller would treat the gain equal to the difference between the basis in the annuity and the surrender value as gross income … and would treat the excess of the sales price over the surrender value as gain from the disposition of property….

Later, officials noted that “any income of the trust of a qualified plan or arrangement that is applied to purchase a participant’s life insurance coverage…is not included in net investment income.”

Charitable remainder trusts (CRTs)
The IRS is creating special rules for charitable remainder trusts (CRTs).

Officials are proposing that “distributions from a charitable remainder trust to a beneficiary for a taxable year consist of net investment income in an amount equal to the lesser of the total amount of the distributions for that year, or the current and accumulated net investment income of the charitable remainder trust.”

If a CRT has more than one beneficiary, the amount of net investment income that the beneficiary must report will be based on the share of the total CRT distribution amount that it gets.

Officials reported that they chose this method rather than a more complicated method that would have involved class-by-class calculations.

Additional Medicare tax (IRC Section 3101(b)(2))
Officials refer briefly to non-qualified deferred comp plans in the draft additional Medicare tax regulations.

The new IRC Section 3101(b)(2) provision would increase the Federal Insurance Contributions Act (FICA) Medicare withholding tax rate for single filers earning more than $200,000 and married joint filers earning more than $250,000 by 0.9 percentage points — to 2.35 percent, from 1.45 percentage points.

The percentage point change would increase the dollar value of the Medicare tax that affected taxpayers pay by 62 percent.

Calculating wages for purposes of the new additional Medicare tax will be the same as calculating wages for other FICA withholding tax purposes, officials said.

“For example, if an employee has amounts deferred under a nonqualified deferred compensation plan and the nonqualified deferred compensation (NQDC) is taken into account as wages for FICA tax purposes under the special timing rule …, the NQDC would likewise be taken into account under the special timing rule for purposes of determining an employer’s obligation to withhold additional Medicare tax, officials said.

See also: 

• Forget the cliff, 3.8% PPACA tax is coming
• 6 tax opportunities to take advantage of now
• PPACA’s Tax Hikes Are Coming: Who Pays?