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Posted by on Jul 3, 2012 in Bailout, Local Government | 11 comments | Print Print

3.8% Medicare Tax

Now that Obamacare has made it this far, let’s re-visit the tax on house sales.  Here is a link to the FAQs from the NAR (hat tip to goaround for the reminder):

http://www.realtor.org/small_business_health_coverage.nsf/pages/health_ref_faq_med_tax?opendocument

The basics:

Q: So who will be subject to the new tax? When is it effective?

The new 3.8% tax will apply to the “unearned” income of “High Income” taxpayers. The new Medicare tax on unearned income will take effect January 1, 2013. Proceeds from the tax will be allocated to shoring up the Medicare fund.

Q: Who is a “High Income” Taxpayer?

Those whose tax filing status is “single” will be subject to the new unearned income taxes if they have Adjusted Gross Income (AGI) of more than $200,000. Married couples filing a joint return with 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: What is “unearned” net investment income?

Unearned income is the income that an individual derives from investing his/her capital. It includes capital 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 these sources, reduced by any expenses associated with earning that income. (Hence the term “net” investment income.)

Q: Give me an example.

If AGI for a single individual is $275,000, then the excess over $200,000 would be $75,000 ($275,000 minus $200,000). Assume that this individual’s net investment income is $60,000. The new 3.8% tax applies to the smaller amount. In this example, $60,000 of net investment income is less than the $75,000 excess over the threshold. Thus, in this example, the 3.8% tax is applied to the $60,000.

If this single individual had AGI if $275,000 and net investment income of $90,000, then the new tax would be imposed on the smaller amount: the $75,000 of excess over $200,000.

Q: Will the 3.8% tax apply to any part of the gain on the sale of a principal residence?

The new Medicare tax would apply only to any gain realized that is more than the $250K/$500K existing primary home exclusion (known as the “taxable gain”), and only if the seller has AGI above the $200K/$250K AGI thresholds.

So, for example, if the taxable gain was $30,000 and a married couple had AGI (which would include the taxable gain) of $180,000, the 3.8% tax would not apply because AGI is less than $250,000. If that same couple had AGI of $290,000, then the application of the 3.8% tax would be subject to the same formula described above. The $30,000 taxable gain on the sale would be less than the $40,000 excess above $250,000 AGI, so the $30,000 gain would be subject to the new 3.8% tax.

11 Comments

  1. Obamacare is a tax?

  2. Sounds as clear as mud, no wonder a new team of IRS agents will be required

  3. We in CA resent the implication that we didn’t “earn” our equity….errrr….I mean income.

  4. With every passing day, trading in my US passport for a Singapore one looks like a better deal…

  5. @5, are you kidding?

    You would trade your US citizenship for the opportunity to buy a small 700 sqft flat for $1 million, and if you want a BMW 3 series, that’ll be over $200k. You’re stuck on an island smaller than the city of SD. All because you need to avoid a 3.8% tax on your rental income over $250k?

  6. The right wing republicans are spreading all kinds of false STUPID rumors. This is going to hurt our chances of ditching Obama not help. We need a bit of common sense here, or this country will sink further down the drain. Not a bunch of radicals on both sides thinking they are smart.They are the problem in this country.

  7. There isn’t one single person in my circle of acquaintances or my entire extended family who will be paying a penny of this tax. I don’t think the CEO of my employer even makes enough to take much of a hit. Anybody who takes a hit from this tax who wsnts to trade places with me, hit me up, I’m game.

  8. @8, I take it you and your circle of acquaintances will not be trading for a Singaporean passport anytime soon?

  9. Almost all high tech people in Silicon Valley make more than $250k as a couple. It may sound like a lot, but a halfway decent house also costs north of a $1 million bucks. When Uncle Sam and his faggot cousin in Sac-ramento take their cut, you’re left with next to nothing.

  10. @8: I little 80s style inflation and we’ll all be making over $250k/yr.

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