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New Tax on Home Sales? – Read Carefully

Have you ever noticed how a title can often mislead you? There is not so much about the moon in the movie “Twilight: Eclipse” nor was “Silence of the Lambs” about happy sheep offspring. And while the Health Care Act is in fact much about health care, it  contains some provisions that might aptly belong under another title. For example, a new 3.8% Medicare contribution tax will be imposed after 2012 on unearned income from interest, dividends, annuities, royalties, rents, and capital gains.

2013 Changes to the Medicare Program

Since the inception of the Medicare program, the Medicare tax has only been imposed on an employee’s “wages” and a self-employed individual’s “earned income.” Starting in 2013, a new 3.8% Medicare Surtax will be imposed on all or a portion of the net investment income (e.g., interest, dividends, annuities, royalties, rents, and capital gains) of certain higher-income individuals. The tax will apply to married individuals filing jointly with modified adjusted gross income (MAGI)exceeding $250,000 (exceeding $200,000 if single, $125,000 if married filing separately).Trusts and estates that have net investment income in excess of certain threshold amounts will also be required to pay the 3.8% Medicare Surtax, unless the income is timely distributed to beneficiaries. However, if the income is timely distributed, the beneficiaries of the trust or estate may be subject to the Medicare Surtax. Note!  Self-employed taxpayers have historically been entitled to an income tax deduction for one-half of the Medicare tax they pay on their self-employed income. Under the new law, you will not be entitled to an income tax deduction for any part of this Medicare Surtax imposed on net investment income, even if you are self-employed.

Medicare Tax on Home Sales

I was recently presented with an opinion posted in “The Spokesman-Review”. In the article, Health Law’s Heavy Impact, the author indicates the Act “Imposes a 3.8 percent tax on home sales and other real estate transactions. Middle-income people must pay the full tax even if they are rich for only one day – the day they sell their house and buy a new one.” This was quite startling to me and I bet to you! While married incomers over $250,000 will be taxed on interest, dividends, etc – Under this interpretation, we all would likely exceed the threshold in the year of sale of our principal residence. Thankfully, this is not the case. The Act provides for several exceptions to what’s included in gross income and subject to the new tax. The following is taken from the Committee Reports and was incorporated into the actual “Act”.

Gross income does not include items, such as interest on tax-exempt bonds, veterans’ benefits, and excluded gain from the sale of a principal residence, which are excluded from gross income under the income tax.

The Lesson

Don’t judge a book by it’s cover, um- title. “Silence of the Lambs” is not about animals (Not 4-legged ones anyway), you will not learn anything about astronomy from “Eclipse”, and there is no new tax on home sales – no matter what the title of this post!

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