Rather than delving into all of the intricacies 

of President Obama's health care legislation in one newsletter, we'll be covering different  

aspects in upcoming newsletters as hot topics arise.  Everybody seems to be aware that it will cost a not-so-small fortune over the coming years; President Obama and Congress hammered out a variety of ways to pay for it.

Investment Tax

One such way to settle up the bill is a new 3.8% tax on investment income, beginning with tax year 2013.  It's considered a Medicare tax, similar to the Medicare tax co-paid by employees and employers on wages (or solely by self-employed individuals on business net income).  This new tax, though, will apply to income arising from non-municipal interest, dividends, annuities, royalties, capital gains and rents for individuals earning over $200,000 or married filing joint filers earning in excess of $250,000.

Ouch!  Long term capital gains rates will be hit hardest since they are set to increase from 15% to 20% in 2011.  With the 3.8% tax added in 2013, long term capital gains rates rise to 23.8%.  For some taxpayers, that rate still remains considerably lower than their marginal rate, yet it does reduce the overall attractiveness of long term capital gains rates.

For those in the highest tax brackets, this extra tax could increase your federal rate to as much as 43.4%.  The government expects the new "surtax" to raise approximately $30 billion annually, or over $210 billion between 2013 and 2019.

Home Sales Tax?

Additionally, some believe that the sale of your home will also be subject to a 3.8% "sales tax."  For most homeowners, this is not the case.  The home sale gain exclusions are expected to remain in effect, which exclude $250,000 of gain, if filing individually, or $500,000 of gain, if filing jointly, from capital gains tax.  Still, any gains above those amounts will be taxed at long term capital gains rates, and, thus, subject to the 3.8% surtax.  Homeowners selling should be sure to meet the IRS criteria for qualifying for the home sale exclusion, which include owning the home for at least two years, living in it as your primary residence for at least two of the last five years, and not claiming the exclusion within the last two years.

Truth or Fiction?

Clients and colleagues have forwarded various articles and emails circulating on the internet regarding the new legislation.  Be cautious, though, of believing everything you read in your inbox.  There is a significant amount of political propaganda for and against various legislators and the President, but, personal political opinions aside, much of it is skewed or incorrect.  For example, the so-called home sales tax was inaccurately covered in an article on the health care legislation in The Spokesman-Review, before being corrected by a local realtor.  We bet you haven't seen the correction, but the original article has made the rounds.  Please contact us before forwarding such e-mails to other contacts; we'd be happy to clarify the new rules for you.  We've received similar emails regarding other provisions in this legislation which are incorrect or which jump to mistaken conclusions about what the legislation means.

Internal Controls - Small Businesses

by Mark DeGiacomo, CPA