Unearned Income Medicare Contribution Tax

Unearned Income Medicare Contribution Tax

by J. Martin Burke*

Section 1402(a)(1) of the Health Care and Education Reconciliation Act of 2010 2010 1 added I.R.C. Section 1411 effective for taxable years beginning after December 31, 2012. IRC Section 1411 imposes a 3.8 percent tax on certain individuals, estates, and trusts. 2 The Code provision, however, specifically provides that the tax does not apply to a trust all of the unexpired interests in which are devoted to one or more of the purposes described in I.R.C. Section 170(c)(2)(B) [i.e., religious, charitable, scientific, literary or educational purposes, or to foster national or international amateur sports, or to prevent cruelty to children or animals]. 3

In the case of an estate or trust, IRC Section 1411(a)(2)  imposes a tax (in addition to any other tax imposed by subtitle A of the Internal Revenue Code) for each taxable year equal to 3.8 percent of the lesser of:

  1. the estate's or trust's undistributed net investment income; or
  2. the excess (if any) of (i) the estate's or trust's adjusted gross income (as defined in IRC Section 67(e)) for such taxable year, over (ii) the dollar amount at which the highest tax bracket in I.R.C. Section 1(e) begins for such taxable year. For 2013, the highest tax bracket for an estate or trust is 39.6 percent and the estate's or trust's taxable income begins to be taxed at that rate once it exceeds $11,950.4

On November 30, 2012, Treasury issued proposed regulations interpreting and applying IRC Section 1411. Those regulations have yet to be finalized. Treasury indicated that the proposed regulations even if finalized would not be effective until January 1, 2014 but that taxpayers could rely on them for compliance purposes until the effective date of the final regulations.

As noted in the Preamble to the Proposed Regulations under  IRC Section 1411, 5 Congress did not provide a rule specifying the particular trusts subject to IRC Section 1411. (As noted above, however, Congress specifically excluded from the tax trusts in which all the unexpired interests are devoted to one or more of the IRC Section 170(c)(2)(B) purposes.) Treasury and the Service, however, determined that IRC Section 1411 would apply to ordinary trusts described in Treasury Regulations Sections 301.7701-4(a). The proposed regulations implement this approach by providing that IRC Section 1411 applies to all estates and trusts that are subject to the provisions of Part I of Subchapter J of Chapter 1 of Subtitle A of the Code. 6

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LEXIS users can access the complete commentary HERE. Additional fees may apply. (Approx. 8 pages)

* J. Martin Burke earned his J.D. from the University of Montana School of Law and his LL.M in Taxation from New York University. Upon completion of his J.D., Professor Burke clerked for the honorable William J. Jameson, Senior Federal District Judge for the District of Montana. He subsequently practiced with the law firm of Crowley, Haughey, Hanson, Toole and Dietrich in Billings, Montana before joining the law faculty at the University of Montana. Professor Burke served as Dean of the University of Montana School of Law from 1988 to 1993 and continues to serve as a full professor of the law faculty. He has also taught as a visiting tax professor at New York University, the University of Florida, and the University of Washington. Professor Burke is active in the American Bar Association Section on Legal Education having served as Chair of both the Section's Accreditation Committee and Standards Review Committee. He is also active in the State Bar of Montana's Professionalism Committee. Professor Burke is also a frequent lecturer at various regional and national tax programs. Professor Burke is the co-author of the following: Taxation of Individual Income (LexisNexis) (with Professor Michael Friel); Modern Estate Planning, Second Edition (LexisNexis) (with Professors Elaine Gagliardi & Michael Friel); Understanding Federal Income Taxation (LexisNexis) (with Professor Michael Friel).

[1] Pub. L. No. 111-152, 124 Stat. 1029

[2] IRC § 1411(a)(1), (2).

[3] IRC § 1411(e); Prop. Treas. Reg. §  1.1411-3(b)(1).

[4] IRC § 1(e).

[5] 77 Fed. Reg. 72612-72652.

[6] Prop. Treas. Reg. § 1.1411-3(a)(1)(i).

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