Rumor has it that the 3.8% Medicare surtax will be applied to all home sale profits after 2012. This tax is intended to fund future Medicare benefits. For those worried about increasing taxes let us clarify. The Federal Insurance Contributions Act imposes two taxes on employers and employees: Social Security and Medicare. Social Security finances the federal old-age survivors and disability act program while Medicare finances hospital and hospital service insurance for those over age 65. The 3.8% Medicare surtax will only be applied to profits that exceed the $250000 or $500000 exclusion for the sale of your principal residence.
Net investment income is defined as the excess of the sum of the following items less any otherwise allowable deductions: gross income from interest dividends annuities royalties and rents unless profits are in the ordinary course of any trade or business; other gross income from any passive trade or business; net gain included in computing taxable income that is attributable to the disposition of property other than property held in any trade or business that is not a passive trade or business.
The new Medicare tax on unearned income is imposed on the lesser of one’s net investment income or any excess of modified AGI over a threshold amount and applies to all tax years beginning after 2012. This includes joint filers with Modified Adjusted Gross Income (MAGI) over $250000 and single taxpayers with MAGI above $200000. This tax may also ably to sales of rentals and second homes.
Robert Keebler a Partner with Baker Tilly Virchow Krause & Company LLP Appleton Wisconsin notes the following:
- The new IRC 1411 likely affects passive real estate interests.
- The threshold amount includes IRA income although IRAs are not net investment income.
- For retired clients whose threshold amount will naturally exceed $250K or $200K. (single) Roth conversions will have additional merit.
- Insurance and deferred annuities will have more merit.
- The threshold for trusts is the income level where the 39.6-percent bracket begins.
- Charitable lead trusts will have more merit.
- Charitable reminder trusts will have merit to help avoid spikes in income.
- Installment sales may have more merit to smooth income.
- Municipal bonds will continue to be popular.
- Strategies will develop to create investment interest deductions.
While the Health Care and Education Reconciliation Act of 2010 is still being discussed to avoid the impending tax increase one should plan to manage income to stay below the MAGI thresholds and limit net investment income.
For more information about this topic contact Lindemeyer CPA.