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Monday, November 19, 2012

3.8% Medicare Surtax on Unearned Net Investment Income

This weekend a caller to Moneytalk asked Bob Brinker about the new tax on unearned income to fund Obamacare.  Brinker gave a "clarification" of the new 3.8% Medicare Surtax on "unearned" Net Investment Income which becomes effective starting Jan 1, 2013 for those with "Adjusted Gross Income" (AGI) exceeding $200,000 for taxpayers filing as "Single" and exceeding $250,000 for taxpayers filing "Jointly".

What bothers me about this tax is people like me who live in the expensive parts of California or New York who have very large capital gains on our homes bought long ago will have to pay this tax if we want to move or sell our home to move to a smaller, retirement home.  Much of the gain I have on my property  is due to inflation so the government has found a way to tax me on inflation it creates!

I found a very good summary of the new tax, who qualifies and how it will be implemented with a few examples at: 

Here is the gist:

Net investment income- Income received from investment assets such as bonds, stocks, mutual funds, loans and other investments  

Capital gain- When a capital asset is sold, the difference between the basis in the asset and the amount it is sold for (or a capital loss if it is sold for less) 

Basis- the cost of an asset which includes the purchase price, shopping, installation, and other services associated with the asset

Adjusted gross income (AGI) - measure of income used to determine how much of your income is taxable and is calculated as your gross income from taxable sources minus allowable deductions, such as unreimbursed business expenses, medical expenses, alimony and deductible retirement plan contributions.

You have a capital gain if you sell the asset for more than your basis. You have a capital loss if you sell the asset for less  than your basis.

Who is subject to this tax?

Taxpayers with incomes or an adjustable gross income (AGI) over $200,000 who file individually or $250,000 for married couples filing jointly could be subject to this tax.  The provision imposes a 3.8 percent tax (identical to the combined employer/employee tax rates on earned income) on income from interest, dividends, annuities, royalties and rents which are not derived in the ordinary course of trade or business, excluding active S corporation or partnership income.  Gross income does not include items, such as interest on tax-exempt bonds, veterans’ benefits, which are excluded from gross income under the income tax.  If capital gains on a primary home sale exceed $250,000 for individuals or $500,000 for a married couple, and the income threshold is met, the excess realized gain is subject to the 3.8% tax.

How does this relate to the sale of a home?

There is no sales tax on home sales in the Reconciliation Act; instead, there is a tax which includes capital gains, rents, dividends and interest income that will only apply to taxpayers under limited conditions.  

When determining if an individual or a couple is subject to the 3.8% tax:
  • A home sale MAY result in a capital gain that increases net investment income
  • A home sale MAY result in a capital gain that increases a taxpayer’s AGI 
NOTE: When selling a home any profit is considered capital gain resulting in a taxpayer’s possible eligibility to qualify for the 3.8% unearned income tax. 

How is this different from the Medicare payroll tax?

Unlike the Medicare payroll tax, this is an unearned income tax.   Unearned income is the income that an individual derives from investing capital. It includes capital gains, rents, dividends and interest income.  

For more, read "New 3.8% Medicare Tax on "Unearned" Net Investment Income"

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