Tuesday, January 15, 2013
The IRS has recently released proposed regulations on the 3.8% medicare surtax. According to the Haynes and Boone Benefit Group, the IRS has proposed that under the surtax, "net investment income includes income from interest, dividends, annuities, royalties, and rents, less any allowable deductions." It is important for taxpayers to take note that net investment will also include income distributions from qualified distribution plans. The plans include those found under I.R.C. "sections 401(a), 403(a), 403(b), 408, 408A, [and] 457(b)." The proposed regulations did not state "whether 404(k) dividends paid under an [ESOP]...would be included in net investment income." While it certain that dividends that are reinvested in a 404(k) plan would not be included, it is not clear whether the tax will apply to dividends directly paid to the plan owner. Provided here is a copy of the proposed regulations.
See Haynes and Boone Benefits Group, IRS Issues Proposed Rules for New Medicare Tax on High Wage Earners' Net Investment Income; Whether Tax Applies to 404(k) Dividends Is Unclear, Practical Benefits Lawyer, Jan. 3, 2013.
Special thanks to Brian Cohan (Attorney at Law, Law Offices of Brian J. Cohan, P.C.) for bringing this article to my attention.