Investment

It began January 1, 2013… a new 3.8% TAX on some investment income.

A common misconception is that it will apply to ALL real estate transactions.

Below are Ten things I want my sellers and buyers in DeBordieu and the Pawleys Island area to know.

But first, so that Realtors like me can better help their clients figure it out, the National Association of Realtors (NAR) has developed a very helpful informational brochure.

CLICK HERE to read it and great scenarios and examples they provide.

In a nutshell, this new 3.8% tax was passed by Congress in 2010 with the intent of generating an estimated $210 Billion to help fund President Obama’s healthcare and Medicare overhaul plans. The tax will fall only on individuals with an adjusted gross income (AGI) above $200,000 and couples filing a joint return with more than $250,000 AGI. It will be imposed on some but not all income from interest, dividends, rents (less expenses),  and capital gains (less capital losses).

Just so you’ll know, this new 3.8% tax was never introduced, discussed or reviewed until just hours before the final debate on the massive health care legislation began. That legislation was in acted on March 23, 2010, more than a year after the health care debate begin. This new tax was put forward after Congress was unable to agree on changes to current law that were sufficient to pay for the proposed changes to the Medicare program increased subsidies to individuals and businesses. The new tax raises more than $210 million over 10 years representing more than half of the total new expenditures in the healthcare reform package. The new tax is sometimes called a Medicare tax because the proceeds from the tax are to be 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.

The second tax, also dedicated to Medicare funding, is imposing on the so-called earned income of higher income individuals. The earned income tax has a much lower rate of 0.9%. Like the 3.8% tax this additional alternative tax is based on adjusted gross income threshold 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 text is presented in example 5 in the brochure.

Another way thinking about these new taxes is to think of the 3.8% taxes be imposed or a portion on 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, commissio

n and some more income related to earning a livelihood.

.1. When you add up all of your income from every possible source, and that total is
less than $200,000 ($250,000 on a joint tax return), you will not be subject to this
tax.
2. The 3.8% tax will never be collected as a transfer tax on real estate of any type, so
you’ll never pay this tax at the time that you purchase a home or other investment
property.
3. You’ll never pay this tax at settlement when you sell your home or investment
property. Any capital gain you realize at settlement is just one component of that
year’s gross income.
4. If you sell your principal residence, you will still receive the full benefit of the
$250,000 (single tax return)/$500,000 (married filing joint tax return) exclusion
on the sale of that home. If your capital gain is greater than these amounts, then
you will include any gain above these amounts as income on your Form 1040 tax
return. Even then, if your total income (including this taxable portion of gain on
your residence) is less than the $200,000/$250,000 amounts, you will not pay this
tax. If your total income is more than these amounts, a formula will protect some
portion of your investment.
5. The tax applies to other types of investment income, not just real estate. If your
income is more than the $200,000/$250,000 amount, then the tax formula will be
applied to capital gains, interest income, dividend income and net rents (i.e., rents
after expenses).
6. The tax went into effect on January 1, 2013. If you have investment income in
2013, you won’t pay the 3.8% tax until you file your 2013 Form 1040 tax return
in 2014. The 3.8% tax for any later year will be paid in the following calendar
year when the tax returns are filed.
7. In any particular year, if you have no investment income (such as income from
capital gains, rents, interest or dividends), you’ll never pay this tax, even if you
have millions of dollars of other types of income.
8. The formula that determines the amount of 3.8% tax due will always protect
$200,000 ($250,000 on a joint return) of your income from any burden of the
3.8% tax. For example, if you are single and have a total of $201,000 income, the
3.8% tax would never be imposed on more than $1,000.
9. It’s true that investment income from rents on an investment property could be
subject to the 3.8% tax. But: The only rental income that would be included in
your gross income and therefore possibly subject to the tax is net rental income:
gross rents minus expenses like depreciation, interest, property tax, maintenance
and utilities.
10. The tax was enacted along with the health care legislation in 2010. It was added to
the package just hours before the final vote and without review. NAR strongly
opposed the tax at the time, and remains hopeful that it will not go into effect.