- November 23, 2024
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Rumors persist about a 3.8% sales tax to be imposed under President Obama’s new health care law.
I’ve heard from many who received email warnings saying, ‘’Under the new health care bill, did you know that all real estate transactions are subject to a 3.8% sales tax?’’
As with many such warning emails, there is some truth buried beneath the fiction. There are also many truths that are left out. With some help from the National Association of Realtors and CPA friend Ted Geppner, I’ll try to make things more clear.
First, it is not part of the health care act. This new tax, effective Jan. 1, was passed in March 2010, a year before the health care act. It’s often referred to as a Medicare Tax because its revenues go to the Medicare Trust Fund.
It is not a sales tax. It does impose a 3.8% tax on some income; from net rents, net capital gains, interest and dividends. Nor does it apply to all real estate transactions or all taxpayers. Taxpayers subject to the new tax are individuals with adjusted gross income (AGI) above $200,000 or joint filers with AGI above $250,000. The new tax applies to the lesser of investment income amount or the excess AGI over the $200,000 or $250,000 amount.
Example No. 1: Suppose joint filers Bob and Sally sold their primary residence, realizing a gain of $550,000. They have $300,000 AGI before adding the taxable gain of the home sale. The first $500,000 gain on the home sale is exempt for joint filers ($250,000 for individuals), leaving only $50,000 of taxable gain. When added, the gain brings the AGI up to $350,000, or $100,000 over the $250,000 threshold for joint filers.
The new tax is applied against the lesser of the excess AGI ($100,000) or the taxable gain ($50,000). At 3.8%, the additional tax will be $1,900. If the gain on the sale of the house was under $500,000, there would have been no new tax imposed.
Example No. 2: Individual filer Hank has an AGI of $100,000 from his “day job.” He also owns several apartment units and received gross rents of $150,000. Will he have to pay the new tax?
Hank’s AGI plus his rental income equal $250,000, but the new tax applies to net rents only. So Hank can subtract his rental expenses (repairs, depreciation, interest, insurance, etc.), which equals $110,000, leaving only $40,000 for net rental income. His $100,000 AGI plus $40,000 equals $140,000, well under the threshold. He will owe no additional taxes.
Remember that March 1 is the deadline for filing for your 2013 Homestead Exemption. Visit www.flaglerpa.com for details on homestead and other exemptions.
