Numerous emails are circulating regarding a new 3.8% tax on homeowners in 2013 when they sell their homes and on investors when they sell property. Using information regarding the Medicare taxing with reference to real estate sales provided by the Congressional Research Service and National Association of Realtors, I will try to give some clarification.
On March 23, President Obama signed Health Care Reform Legislation into law — the Patient Protection and Affordable Care Act (PPACA;P.L. 111-148), some provisions of which are amended by the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152) PPACA will, among other things, raise revenues to pay for expanded health insurance coverage by imposing excise taxes and fees on industries in the health care sector, limiting tax-advantaged health accounts, increasing the Medicare payroll tax on upper-income households, and adding an additional tax on net investment income on upper-income households. The new law will also eliminate the tax deduction for expenses allocatable to the Medicare Part D subsidy to employers.
Q: Does the new health care law impose a 3.8% tax on profits from selling your home?
A: No, with a few exceptions. The first $250,000 in profit from the sale of a personal residence won’t be taxed, or the first $500,000 in the case of a married couple. The tax falls on relatively few – those with high incomes from other sources.
Q: Who will be subject to the new taxes imposed in the health legislation?
A: A new 3.8% tax will apply to the “unearned” income of “High Income” taxpayers. Another 0.9% tax will apply to the “earned” income of many of these same individuals. Both levies are referred to as “Medicare” taxes.
Q: Who is a “High Income” Taxpayer?
A: Those whose tax filing status is “single” will be subject to new unearned income taxes if they have Adjusted Gross Income (AGI) of more than $200,000. Married couples filing a joint return AGI of more than $250,000 will also be subject to the new tax. (The AGI threshold for married filing separate returns is $125,000).
Q: Are the $200,000 and $250,000 thresholds indexed for inflation?
A: No. Thus, over time, more individuals may become subject to this tax.
Q: When does the new 3.8% Medicare tax take effect?
A: The new Medicare tax on unearned income will take effect January 1, 2013.
Q: What is “unearned” net investment income?
A: Unearned income is the income that an individual derives from investing his/her capital. It includes gains, rents, dividends and interest income. It also comes from some investments in active businesses if the investor is not an active participant in the business. The portion of unearned income that is subject both to income tax and the new Medicare tax is the amount of income derived from theses sources, reduced by an expenses associated with earning that income. (Hence the term “net” investment income). Thus, in the case of rents, the taxable amount would be gross rents minus all expenses (including depreciation) incurred in operating the rental property. So if gross rents were $100,000 with association expenses of $40,000; net rents of $60,000 ($100,000 minus $40,000) would be included in Adjusted Gross Income (AGI).
If you have concerns about this bill or any other bill, it is important that you contact your congressman and express your dissatisfaction with these bills.