The proposed regulations are 159 pages; read the proposed regulations: REG-130507-11 [PDF 323 KB]
The IRS today also released a list of frequently asked questions concerning the net investment tax.
Background
Section 1411—added to the Code by the Health Care and Education Reconciliation Act of 2010, and effective for tax years beginning after December 31, 2012— imposes a 3.8% tax on certain income and gain (“net investment income”) of high income individuals and certain estates and trusts.
Net investment income includes interest, royalties, dividends, annuities and rents; income from a passive trade or business (within the meaning of section 469); income from the business of trading financial instruments (regardless of whether it is active or passive); and net gain on the sale of assets that produce net investment income. Net investment income is the income after deductions for expenses that are “properly allocable” to the income.
Net investment income does not include a distribution from a qualified retirement plan, active trade or business income (within the meaning of section 469) that is not the business of trading financial instruments, income subject to SECA (Self Employment Contributions Act), and income that is otherwise excluded from tax, such as tax-exempt bond income or gain on the sale of a principal residence.
The tax may apply to married couples filing a joint tax return with modified adjusted gross income in excess of a “threshold amount” of $250,000, $200,000 for single filers, and $125,000 for married filing separately and to estates and trusts with adjusted gross income over a “threshold amount” equal to the dollar amount at which the highest tax bracket in section 1(e) begins for the tax year. The tax applies to the lesser of the “threshold amount” or the taxpayer’s “net investment income.”
For example, if net investment income for a married couple (filing a joint return) is $20,000 and their modified AGI is $260,000, the 3.8% tax applies to $10,000 of income.
The tax paid is not deductible and is not withheld by an employer. The tax must be counted in determining whether taxpayers are required to make estimated tax payments.
Outline of proposed regulations
The proposed regulations were released this afternoon. An overview is as follows:
- Prop. Reg. section 1.1411-1 provides general operating rules applicable to section 1411.
- Prop. Reg. section 1.1411-2 provides specific rules applicable to individuals.
- Prop. Reg. section 1.1411-3 provides specific rules applicable to estates and trusts.
- Prop. Reg. section 1.1411-4 provides rules for defining net investment income.
- Prop. Reg. section 1.1411-5 provides rules for net investment income derived from trades or businesses that are passive activities or trading in financial instruments or commodities.
- Prop. Reg. section 1.1411-6 provides rules for gross income and net gain on the investment of working capital.
- Prop. Reg. section 1.1411-7 provides rules for dispositions of interests in partnerships and S corporations.
- Prop. Reg. section 1.1411-8 provides rules for distributions from certain qualified plans.
- Prop. Reg. section 1.1411-9 provides rules for items taken into account in determining self-employment income.
- Prop. Reg. section 1.1411-10 provides rules with respect to controlled foreign corporations (CFC) and passive foreign investment companies.
- Prop. Reg. section 1.469-11(b)(3)(iv) provides a regrouping “fresh start” under section 469 for certain taxpayers.
The proposed regulations will be published in the Federal Register on Wednesday, December 5, 2012. Comments are due by a date that is 90 days after December 5, 2012.
A public hearing on the proposed regulations is scheduled for April 2, 2013.