We have had several posts on the new 3.8% net investment income tax applying to individuals with net investment income especially rents. We sometimes forget that this tax will apply to trusts and estates beginning in 2013 and the applicable level is much lower. All the way down to less than $12,000.
This means if a trust owns cash rented farm real estate, then most likely the trust will owe income taxes in excess of 43% federal plus any related state income taxes. In order to prevent this tax, we recommend that the trust distribute enough income to its beneficiaries to get the trust down to a lower bracket.
Sometimes it is hard to distribute the exact amount of income by year-end so the tax provisions allow you to count certain distributions made within 65 days of year-end as being made in the prior year. This allows to match up distributions with trust income.
If you had set up an intentionally defective grantor trust (many farmers did at the end of last year when making large gifts), this tax will not apply to the trust. This is due to the "trust" not existing for income tax purposes, however, the income will be reported on your personal return and you may be subject to the tax at that level.
This new tax is very complex and even the IRS person in charge of drafting the Regulations indicate they are a moving target and subject to change. We have temporary Regulations right now and hope to have final ones by the end of the year. You know that the term "final" in tax law is just until they change it (again).
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