Back in August of 2013, the IRS issued a draft Form 8960, which is to be used by individuals, estates and trusts who are subject to the new Obamacare net investment income tax. The IRS has now just released draft instructions to the Form 8960 which offers some additional insights on the application of this new tax.
The new tax was part of Obamacare and subjects certain unearned income of individuals, trusts and estate to a surtax of 3.8% (it’s called a surtax because it’s payable on top of any other tax payable on that income). Generally, for individuals, the surtax is payable on unearned income over the threshold amount of $250,000 (for joint filers). For trusts and estates however, the surtax kicks in at a much lower threshold, generally around $11,000. Because of this, many trusts and estates have an incentive to distribute income to beneficiaries in an effort to avoid, or at least minimize the 3.8% surtax.
The draft instructions have worksheets applicable to nonresident spouses and net operating loss dedcutions. Because regulations themsevles have not yet been finalized on the surtax, it remains to be seen whether the form and its related instructions will be modified.