3.8% Medicare Tax - Will it Affect Me?

06.27.2012  |  category: For_Sellers  |  posted by: Joy Mengeringhausen

taxProbably not! In fact, a very small percentage of homeowners will have to pay this tax. Many homeowners are concerned this tax will gobble up their profits when selling their home. Truth is, this tax will not affect most homeowners when selling their primary (principal) residence.

What is the tax?
Contrary to popular belief the tax is NOT on the transfer of property. The new 3.8% tax is a medicare tax on unearned income. Proceeds will go to building up the medicare fund for years to come.

Who will pay the tax?
The 3.8% tax will apply to “unearned income” of “high income” taxpayers. The new tax will take effect January 1, 2013.

Who is a “High Income” Taxpayer?
Single persons with an Adjusted Gross Income (AGI) of $200,000. Married couples with an AGI of $250,000, Married filing separately with an AGI of $125,000.

If my Adjusted Gross Income is below $200,000 or $250,000 if married, will I have to pay this tax?
No. the tax only applies to those earning over the $200K or $250K if married with incomes from investments. 

What is unearned income?
It is investment income including capital gains, rents, dividends, and income from interest; less any expenses associated with earning the income.

I do not earn income from investments, rents, dividends or capital gains but my income from my regular job is over $300K do I have to pay this tax?
No, the tax is only for high income earners who are earning income from investments. 

Does the tax apply to yearly appreciation of an asset?
No. Capital gains are subject to the new tax only in the year it is sold. The amount is measured in the same way it is for income taxes. Net capital gains are only taxable the year of the sale.

Will the tax apply to the gain on the sale of a principal residence?
Maybe. The new Medicare Tax will ONLY apply to any gain over the $250K/$500K exclusion and ONLY if the seller has AGI over the $200K/$250K AGI threshold.

Will the $250K/$500K Capital Gain exclusion on the sale of a principal residence continue to apply?
Yes. Any gain less than the $250K/$500K gain exclusion will continue to be excluded from income tax. The new 3.8% medicare tax will NOT apply to this excluded amount of gain.

How is the 3.8% Medicare Tax calculated?
The tax is assessed only when Adjusted Gross Income (AGI) is above $200,000./$250,000. AGI includes net income (the amount left after all the expenses) from interest, dividends, rents, capital gains, or other forms of income listed on Form 1040.

The tax is NOT imposed on total AGI nor solely on NET investment income. The taxable amount will depend on a formula and amount paid will be the lesser of either (1) net investment income or (2) the excess of AGI over the $200,000/$250,000 AGI thresholds. Therefore if the net income is the lesser amount, the 3.8% tax will be applied to the net income. However, if the excess AGI is the lesser amount, the tax will be paid only on the excess AGI.

My rental property operates with a loss each year. How will this factor in with the new tax?
Losses reduce AGI. Therefore the losses themselves would not be subject to the tax. If after the losses AGI is still greater than the High Income thresholds, the 3.8% medicare tax would still apply to any net rental, interests, dividends and other forms of income listed on form 1040.

All of my income is from real estate investments that I own and operate myself. Will the rents and gains be subject to the medicare tax?
No. If your business is the operation of your own rentals and your only source of income, it will not be subject to the 3.8% tax. If however you have a day job, the real estate investments cannot be considered your trade or business making them subject to the tax.

The information contained herein is believed to be accurate. However, every persons individual tax situation may be different. The reader is advised to seek the advice of an accountant or tax attorney before acting on the information contained herein.  

Thinking of selling a home, condo or other Real Estate in Fort Myers Beach, Fort Myers, Cape Coral, North Fort Myers, Bonita Springs, Estero, Naples, Matlacha, Saint James City, Bokeelia, Pine Island, Sanibel, Captiva, and Lehigh Acres? Get in touch, I would love to interview for the chance to represent your best interest.

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