The 3.8% Tax: Real Estate Scenarios & Examples
Beginning January 1, 2013, as a result of the passing of what how become know as 'Obamacare', a 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. Effective January 1, 2013, a new 3.8 percent tax on some investment income will take effect.
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.
We highly recommend you contact your accountant and investment professionals as this new tax will affect some real estate transactions: it’s a complicated tax and there is no way for us to predict how it will affect every buyer or seller.
Understand that, contrary to some reports, this new 3.8% tax WILL NOT be imposed on all real estate transactions. Rather, when the legislation becomes eff ective on January 1, 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.
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.