New 3.8 Percent Tax on Investment Income and .9 Percent Additional Medicare Tax
(Parker Tax Publishing: December 2, 2012)

New 3.8 Percent Tax on Investment Income      Download IRS pdf

On Friday, the IRS issued proposed regulations [REG-130507-11] on the new 3.8 percent tax on investment income that applies beginning in 2013. The guidance is welcome news for tax practitioners because it provides more certainty on applying, and helping clients plan for, the new tax.

The tax applies to individuals, estates, and trusts. In the case of an individual, the tax is computed on the lesser of: (1) net investment income; or (2) the excess of modified adjusted gross income over a threshold amount. The threshold amount is $250,000 in the case of a taxpayer filing a joint return or a surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case.

For purposes of the tax, investment income is the sum of: (1) gross income from interest, dividends, annuities, royalties, and rents (other than income derived in the ordinary course of any trade or business to which the tax does not apply); (2) other gross income derived from any trade or business to which the tax applies; and (3) net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property other than property held in a trade or business to which the tax does not apply. In the case of a trade or business, the tax applies if: (1) the trade or business is a passive activity with respect to the taxpayer; or (2) the trade or business consists of trading financial instruments or commodities.

The proposed regulations address one of the key concepts in calculating the tax – the definition of a trade or business. Under the proposed regulations, the rules under Code Sec. 162 apply for determining whether an activity is a trade or business for purposes of Code Sec. 1411. The rules for determining a trade or business under Code Sec. 162 are well established and there is a large body of case law; thus, using this definition should simplify taxpayer compliance.

The tax applies to a passive activity that involves the conduct of a trade or business. Thus, the concept of a “passive activity” is central to the imposition of the 3.8 percent tax. The definitions of “trade or business” and “passive activity” for Code Sec. 1411 purposes are more restrictive than for Code Sec. 469 purposes. Thus, in some cases, the proposed regulations provide that gross income from activities that are passive activities under Code Sec. 469 will not be taken into account for purposes of Code Sec. 1411 because the gross income is derived from an activity that does not rise to the level of a trade or business. In such cases, the gross income will not be taken into account under Code Sec. 1411 unless it is taken into account under another provision.

The regulations are proposed to be effective for tax years beginning after 2013, with an exception for the portion of the regulations relating to charitable remainder trusts which are proposed to apply to tax years beginning after 2012. However, taxpayers can rely on them for purposes of complying with Code Sec. 1411 until final regulations are issued.

.9 Percent Additional Medicare Tax      Download IRS pdf

On Friday, the IRS issued proposed regulations [REG-130074-11] on the new .9 additional hospital insurance tax, referred to as the “Additional Medicare Tax,” that applies to individuals beginning in 2013. The Additional Medicare Tax differs from the Medicare Tax in that the Additional Medicare Tax is not imposed until wages exceed a threshold amount, and the threshold amount for applying the tax is based on the filing status of the individual. The threshold amount is $250,000 in the case of a joint return, $125,000 in the case of a married taxpayer filing a separate return, and $200,000 in any other case. The Additional Medicare Tax also differs from the Medicare Tax in that there is no employer portion to correspond to the amount owed by the employee.

The proposed regulations provide guidance for employers and individuals relating to the implementation of the Additional Medicare Tax, including the requirement to withhold the tax on certain wages and compensation, the requirement to file a return reporting the tax, the employer process for adjusting underpayments and overpayments of the tax, and the employer and employee processes for filing a claim for refund of the tax.

While the regulations are proposed to be effective when finalized, taxpayers can rely on them now for purposes of complying with the new rules.

(Staff Editor at Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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