There is a lot of confusion about the ObamaCare 3.8% Tax as well as surprise. It just so happens by chance that this new TAX is to take effect on January 1st, 2013 – just after the election…
I thought I would source some reliable information about this new tax now that the Supreme Court upheld all the new taxes in this new law.
First, this is not a Sales Tax but rather an Income Tax on income from interest, dividends, rents, and capital gains. The National Association Realtors have provided a great resource to help understand this new complicated tax.
This bill was passed by Congress in 2010 with the intent of generating an estimated $210 billion to help fund President Barack Obama’s health care and Medicare overhaul plans.
Understand that this tax WILL NOT be imposed on all real estate transactions, a common misconception. Rather, when the legislation becomes eff ective in 2013, it may impose a 3.8% tax on some (but not all) income from interest, dividends, rents (less expenses) and capital gains (less capital losses). The tax will fall only on individuals with an adjusted gross income (AGI) above $200,000 and couples fi ling a joint return with more than $250,000 AGI.
- Individuals with adjusted gross income (AGI) above $200,000
- Couples filing a joint return with more than $250,000 AGI
- Types of Income: Interest, dividends, rents (less expenses), capital gains (less capital losses)
Formula: The new tax applies to the LESSER of :
- Investment income amount
- Excess of AGI over the $200,000 or $250,000 amount
Source: National Association of Realtors
In the PDF Report from NAR, they break down examples of how the tax may impact you. Below is an example of a primary residence sale. It becomes more complicated if you inherit investment property, selling a 2nd home, or earn income from investment property. Those examples can also be found in NAR’s report.
Capital Gain: Sale of a Principal Residence
John and Mary sold their principal residence and realized a gain of $525,000. They have $325,000 Adjusted Gross Income (before adding taxable gain).
The tax applies as follows:
- AGI Before Taxable Gain $325,000
- Gain on Sale of Residence $525,000
- Taxable Gain (Added to AGI) $25,000 ($525,000 – $500,000)
- New AGI $350,000 ($325,000 + $25,000 taxable gain)
- Excess of AGI over $250,000 $100,000 ($350,000 – $250,000)
- Lesser Amount (Taxable) $25,000 (Taxable gain)
- Tax Due $950 ($25,000 x 0.038)NOTE: If John and Mary had a gain of less than $500,000 on the sale of their residence, none of that gain would be subject to the 3.8% tax. Whether they paid the 3.8% tax would depend on the other components of their $325,000 AGI.
NAR has a commentry on this new tax which is rather lengthy – but given the nature in which this tax was passed certainly should create a lot of tension.
This new tax was never introduced, discussed or reviewed until just hours before the final debate on the massive health care legislation began. Th at legislation was enacted on March 23, 2010, more than a year after the health care debate began. This new tax was put forward after Congress was unable to agree on changes to current law that were suffi cient to pay for the proposed changes to the Medicare program and increased subsidies to individuals and businesses.
The new tax raises more than $210 billion (over 10 years), representing more than half of the total new expenditures in the health care reform package. NAR expressed its strongest possible objections, but the legislation passed on a largely party line vote.
The new tax is sometimes called a “Medicare tax” because the proceeds from it are to be dedicated to the Medicare Trust Fund. That Fund will run dry in only a few more years, so this tax is a means of extending its life.
A second new tax, also dedicated to Medicare funding, is imposed on the so-called “earned” income of higher income individuals. This earned income tax has a much lower rate of 0.9% (0.009). Like the tax described in this brochure, this additional or alternative tax is based on adjusted gross income thresholds of $200,000 for an individual and $250,000 on a joint return. Like the 3.8% tax, this 0.9% tax is imposed only on the excess of earned income above the threshold amounts. An example and some analysis of this
tax is presented in Example 5 of this brochure.
Another way of thinking about these new taxes is to think of the 3.8% tax as being imposed on a portion of the money that you make on your money — your capital (sometimes referred to as “unearned income”). The 0.9% tax is imposed on a portion of the money you make on your labor — your salary, wages, commission and similar income related to earning a livelihood.