You may have heard about a new ‘medicare tax’ which was enacted on March 23, 2010. Beginning January 1, 2013, a new 3.8% tax on some investment income will take effect. Since this new tax will affect some real estate transactions, I’d like to summarize it for you.
The new tax was passed by Congress with the intent of generating more than $210 billion (over 10 years), representing more than half of the total new expenditures in the health care reform package. Its primary function is to help fund President Barack Obama’s health care and Medicare overhaul plans.
This tax WILL NOT be imposed on all real estate transactions, a common misconception. Rather, when the legislation becomes effective 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 filing a joint return with more than $250,000 AGI.
It’s important to remember that the new tax applies to the LESSER of either:
1) Investment income amount, or
2) Excess of AGI over the $200,000 or $250,000 amount
It’s a complicated tax, so please refer to your tax specialist to find out how it will affect your personal situation.