Beware of the 3.8% Medicare Surtax for Estates and Trusts
Ever since the United States Supreme Court upheld the Affordable Care Act, most of the focus has been on how this increased tax effects individual taxpayers. As determined by this decision, individual taxpayers with modified adjusted gross income over $200,000 (or $250,000 for married taxpayers) are subject to an increased 3.8% Medicare surtax on certain investment income beginning in 2013.
Little focus has been given on how this increased Medicare surtax will increase tax liabilities for trusts and estates. Income in an irrevocable trust is either taxed to the trust or to the trust beneficiaries. If income in the trust or estate is accumulated at the trust or estate level, then the trust or estate pays the income tax. If the income is distributed to the beneficiaries, however, the trust receives an income tax deduction for the amount of the distributable net income (DNI) and the beneficiaries report the taxable income.Â
In the case of a trust or estate, the 3.8% Medicare surcharge is imposed on the lesser of either undistributed net investment income or the excess of adjusted gross income over the highest estate or trust income tax bracket. For 2013, the highest trust income tax bracket begins at $11,950, […]