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Oct 24Roger Kohl

New 3.8% Medicare tax has frequently been misreported as a 3.8% sales tax on real estate transactions

Oct 24Roger Kohl

This confusion was prompted by The Patient Protection and Affordable Care Act (PPACA), one of the bills we had to “pass it to find out what’s in it“, that along with the Health Care and Education Reconciliation Act of 2010, are collectively sometimes referred to as “Obamacare”.  Federal statutes signed into law on March 23, 2010. This is complicated legislation and does contain a 3.8% Medicare surtax that has been frequently misreported as a 3.8% “sales tax” on all real estate transactions.

That is not exactly true.  While this is a new tax, it will effect relative few tax payers as illustrated below.

Background

Section 1411 of PPACA, imposes a 3.8% Medicare surtax on unearned income of higher income taxpayers. This tax applies to individuals, estates and trusts. Unearned income, as you may know, includes dividends, annuities, rents, capital gains, rents and royalties not derived in the ordinary course of a trade or business. If a taxpayer is passive as to a stream of trade or business income, the income will be considered unearned or if the taxpayer’s business is trading in financial instruments or commodities, such income will be considered unearned.

Code Section 1411 imposes this 3.8% surtax on the lesser of:

  1. net investment income or
  2. the excess of modified adjusted gross income over the threshold amount ($250,000 for taxpayers married filing jointly, $125,000 for married taxpayers filing separately and $200,000 for all other taxpayers) and goes into effect for taxable years beginning after December 31, 2012.

The sale of your principle residence capital gain exclusion  (M-$500K, S-$250K) remains, at this time, and is still one of the best “tax breaks” out there.

To address homeowners who have posed this question perhaps the examples below are the clearest to illustrate how this tax could impact you (Assumptions: Married filing jointly and no other unearned income except the gain on the sale of your principle residence):

 

Click on Chart for More Clear View

This surtax applies to all other capital gains as well, that bring taxable income above $250K (Married, joint return) or above $200K for single filers and applies only to the income above the threshold.

Medicare tax?  Sales tax?  Whatever, this is indeed a new surtax that will impact some.

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