Net Investment Income Tax (NIIT)

Certain estates and trusts may be subject to the NIIT. Estates and trusts use Form 8960 to report their NII and calculate the tax. The amount of NIIT payable by the estate or trust is reported on Form 1041, Schedule G, line 5.

The NIIT is imposed on estates and trusts to the extent that they have undistributed NII and AGI exceeding $15,650. See Definitions, earlier, for the calculation of an estate’s or trust’s AGI. The following types of estates and trusts may owe the NIIT in addition to their regular income tax liability.

• Decedents’ estates.

• Simple and complex trusts.

• ESBTs.

• Pooled income funds.

• Bankruptcy estates.

However, in the case of bankruptcy estates, the AGI threshold is $125,000.

Calculation of NII. In general, an estate’s or trust’s NII is calculated in the same way as an individual’s. However, there are special rules for the calculation of NII in the case of an ESBT. See the Instructions for Form 8960 and Regulations section 1.1411-3(e) for information on the calculation (and Regulations section 1.1411-3(c)(1) for information on the ESBT calculation).

Distributions on NII. The NIIT is imposed on estates and trusts to the extent they have undistributed NII. In order to arrive at the estate’s or trust’s undistributed NII, the estate’s or trust’s NII is reduced for (1) distributions of NII to beneficiaries, and (2) NII allocable to charities when the estate or trust is allowed a deduction under section 642(c). The instructions for Form 8960, line 18b, provide more information on the calculation of undistributed NII.

NII allocable to the deduction under section 642(c). An estate’s, trust’s, or pooled income fund’s NII is reduced by the amount of NII allocable to the charitable deduction allowed under section 642(c). In the case of an estate, trust, or pooled income fund that has NII and non-NII income in a year

• The estate or trust owns directly, or indirectly, an (a) interest in a section 1291 fund, or (b) interest in a controlled foreign corporation or qualified electing fund and no election under Regulations section 1.1411-10(g) has been made with respect to that interest; and

• The distribution from one of the entities described above is (a) NII to the estate or trust, but not included in its taxable income; and (b) the distributions from the estate or trust to the beneficiary(ies) in the year exceed the amount of the income distribution deduction allowed for regular tax purposes (from Schedule B, line 15).

Special rules. In the final year of an estate or trust, deductions in excess of income may be reported to the beneficiary in box 11 of Schedule K-1. These deductions may also be deductible by the beneficiary for NIIT purposes. In this situation, the terminating estate or trust should provide the beneficiary information regarding whether the amounts reported in box 11, codes A through E, include any amounts that are deductible for NIIT purposes. See Regulations section 1.1411-4(g)(4).