 Portions compliments of REALTOR® Magazine:
Shortly after the federal government enacted healthcare reform in 2010, there was considerable concern over a last-minute addition to the legislation: a 3.8% tax on investment income of upper-income households to help shore up Medicare. The tax takes effect in 2013. Individuals earning $200,000 a year or more and married couples earning $250,000 a year or more, certain investment income above these income levels might be subject to the 3.8% tax on a portion of that income. "Might" is the keyword depending on many factors having to do with the kind and amount of the investment income the household receives. Investment income includes capital gains, dividends, interest payments, and, for those who own rental property, net rental income. Importantly, the $250,000 (for individuals) and $500,000 (for married couples) capital gain exclusion on the sale of a principal residence remains in place. So, if you're a married household that sold a house for a $500,000 gain (that's gain, not sale proceeds), that amount remains excluded from your income calculation. Let's take a look at a married couple that has $325,000 in adjusted gross income (AGI), plus $525,000 in capital gains from the sale of their house. This household would be considered upper-income by most standards. Not only is their income relatively high, at $325,000 (adjusted gross income, or AGI), but they're receiving a $525,000 gain on their house sale. Presumably, they bought their house years ago and it's appreciated over the years, so upon selling it, their gain is a relatively high $525,000. For this household, $25,000 in investment income would be subject to the 3.8 percent tax. That would amount to $950. That's because it's the $25,000 over the $500,000 capital gains exclusion that's taxable. Before they would know that, though, they would have to do a calculation that involves their adjusted gross income. They would have to add their capital gain of $25,000 to the amount of their income above the $250,000 income trigger (for married couples). Since their income is $325,000, they would add the $25,000 to $75,000 ($325,000 - $250,000), which would equal $100,000. Then they would compare the $25,000 to that $100,000, and apply the tax to the lesser of the two, which is the $25,000. Thus, $25,000 x 3.8% = $950. So, you have a household that had income of $850,000 for the year, and its tax on investment equaled $950. NAR has prepared a brochure that can be viewed here that details every single facet of this tax. To learn more about it, click here. Be sure to share this brochure with clients who you feel need to learn more about the tax. |
