8654 / When is an estate or trust subject to the investment tax?
Certain trusts and estates may be subject to the 3.8 percent net investment income tax. Basically, the tax is imposed on any net investment income that remains in the estate or the trust and, thus, is not distributed to beneficiaries, otherwise referred to as “undistributed net investment income.” Unlike individual taxpayers, the threshold amount is the amount at which the highest regular income tax bracket begins. Additionally, unlike the applicable threshold amount for individuals, the applicable threshold is adjusted for inflation.1
For example, in 2025, the amount at which the highest income tax bracket begins with adjusted gross income in excess of $15,650.2 In 2026, the highest income tax bracket will begin with adjusted gross income in excess of $16,000. As this amount is relatively low, many estates and trusts should expect to be subject to the tax.
The following examples are used to demonstrate the computation of the net investment income tax for a trust.
Example: In 2025, the Dinosaur trust has AGI of $16,000 and undistributed net investment income of $6,000. The net investment income tax is imposed on trusts and estates on the lesser of: 1) Undistributed Net Investment Income, $6,000; or 2) The excess of (i) AGI of $16,000, over (ii) $15,650, the amount at which the highest regular tax bracket begins, or $350.
Example: In 2025, the Dinosaur trust has AGI of $25,000 and undistributed net investment income of $6,000. The net investment income tax is imposed on trusts and estates on the lesser of: 1) Undistributed Net Investment Income, $6,000; or 2) The excess of (i) AGI of $25,000, over (ii) $15,650, the amount at which the highest regular tax bracket begins, or $9,350.
Even though there is $6,000 of undistributed net investment income, because the lesser of the two amounts is $350, only that amount is subject to the 3.8 percent net investment income tax.
Example: In 2024, the Dinosaur trust has AGI of $25,000 and undistributed net investment income of $6,000. The net investment income tax is imposed on trusts and estates on the lesser of: 1) Undistributed Net Investment Income, $6,000; or 2) The excess of (i) AGI of $25,000, over (ii) $15,650, the amount at which the highest regular tax bracket begins, or $9,350.
Because the lesser of the two amounts is the undistributed net investment income of $6,000, the entire amount of undistributed net investment income is subject to the 3.8 percent net investment income tax.
1. IRC § 1411(a)(2)(B)(ii).
2. Rev. Proc. 2024-40.