Year End Planning Tip: 3.8% Surtax on Investment Income 

November, 2013 - Rice M. Tilley, Jr., John M. Collins, William D. Ratliff, III, J. Mitchell Miller, Jeffrey E. Raley, Danika Hudik Mendrygal, Rebecca E. Whitacre, Jamie L. Harris

As the end of 2013 draws near, taxpayers should consider the effect of the new 3.8% surtax on investment income. Beginning January 1, 2013, a 3.8% surtax is placed on certain investment income for individuals, trusts, and estates. The surtax is imposed in addition to all other taxes imposed by the Internal Revenue Code (including the alternative minimum tax). Prior to the end of 2013, individuals, trustees, and executors should consider ways to minimize the 3.8% surtax.

For purposes of the surtax, investment income consists of the following:

    (i) gross income from interests, dividends, annuities, royalties, and rents; 
    (ii) gross income from a passive activity or trade or business of trading in financial instruments or commodities; and 
    (iii) net gain to the extent it is taken into account in determining taxable income (i.e., capital gains).

Distributions from qualified retirement plans are exempt from the surtax.

For individuals: The surtax applies if modified adjusted gross income exceeds a threshold amount ($250,000 for joint filers and surviving spouses, $125,000 for a married taxpayer filing a separate return, and $200,000 for all others).

For trusts and estates: The surtax applies to undistributed net investment income in excess of a much smaller threshold ($11,950 for 2013).

For example, a trust with $100,000 of investment income in 2013 would owe $3,346 of surtax (3.8% of $88,050) in addition to the income tax assessed for 2013. These rules do not apply to grantor trusts because all of the trust income will be included on the grantor’s individual return.

The trustee of a non-grantor trust faced with a significant potential surtax should consider distributions to beneficiaries who are not subject to the surtax, which could avoid both the surtax and a higher regular income tax rate. If an election is made on a timely filed tax return (including any extensions), the trustee may treat distributions prior to March 6, 2013 as if they were made on December 31, 2013.

Please contact your accountant or one of the attorneys listed below if you would like additional information on the effects of the 3.8% surtax on investment income. 

Rice M. Tilley, Jr.*
[email protected]


John M. Collins
[email protected]


William D. Ratliff*
[email protected]


J. Mitchell Miller
[email protected]


Jeffrey E. Raley
[email protected] 

Danika H. Mendrygal
[email protected]

Rebecca E. Whitacre
[email protected]

Jamie L. Harris
[email protected]

To ensure compliance with requirements imposed by U.S. Treasury Regulations, Haynes and Boone, LLP informs you that any U.S. tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

*Board Certified – Estate Planning and Probate Law and Tax Law by the Texas Board of Legal Specialization.


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