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Additional 3.8% Medicare Tax Imposed on Trust and Estate Income

Hinshaw Culbertson LLP - Chicago Office

December 13, 2013

Previously published on December 11, 2013

Beginning in 2013, trusts and estates will be subject to an additional 3.8% Medicare tax on “net investment income” in excess of $11,950. Net investment income includes interest, dividends, rents (unless the trustee is actively participating in a real estate business), royalties, capital gains and income from a trade or business (unless the trustee is actively participating in the business). This new rule will put an additional income tax burden on any trust or estate that does not distribute most of its net investment income.

A trust or estate may mitigate this additional cost by distributing income to beneficiaries who are in lower income tax brackets and who are not subject to the 3.8% Medicare tax. With the proper election, distributions made within 65 days after a year end can be considered on the prior year’s income tax return. By using the 65-day rule, a trustee can calculate a trust’s net investment income before having to make the distribution of such income.

Proper selection of trustees and co-trustees will be important in avoiding additional income taxes on passive income from real estate activities and passive income from trades or businesses.


The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

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