Does the 3.8% Healthcare Tax Affect You?

The Healthcare Measure was recently passed, which imposes a 3.8% tax which will affect some people.

Important things to know about this tax are that, first of all, there may be some analyses which may not be correct.  For instance, this Measure does not mean that you will be paying a 3.8% tax on the sale of your home after 2012.

As stated in columnist Kenneth Harney's article of July 15th:  "Yes, there is a new 3.8% surtax that takes effect Jan. 1 on certain investment income of upper-income individuals — including some of their real estate transactions. But it's not a transfer tax and not likely to affect the vast majority of homeowners who sell their primary residences next year." 

The surtax does not change the current capital gains exclusions of $250,000 (single tax filers) or $500,000 (joint tax filers, i.e., couples) for the sale of your principal residence.  But, basically, any gains above those amounts on the sale of your residence and if your income is above the $200,000 (single filer) or $250,000 (joint filer) annual income thresholds, you may then be exposed to the 3.8% surtax.

Therefore, it will be important to gather documentation on your property concerning improvements and expenses--including your closing costs--which increase your tax basis in order to lower your capital gains.

The National Asssociation of REALTORS at their website shows the following sample:

Say you and your spouse have adjustable gross income (AGI) of $325,000 and you sell your home at a $525,000 profit. Assuming you qualify, $500,000 of that gain is wiped off the slate for tax purposes. The $25,000 additional gain qualifies as net investment income under the healthcare law, giving you a revised AGI of $350,000. Since the law imposes the 3.8% surtax on the lesser of either the amount your revised AGI exceeds the $250,000 threshold for joint filers ($100,000 in this case) or the amount of your taxable gain ($25,000), you end up owing a surtax of $950 ($25,000 times 0.038).

Capital Gain: Sale of a Principal Residence

AGI Before Taxable Gain  $325,000

Gain on Sale of Residence  $525,000

Taxable Gain

(Added to AGI) $25,000 ($525,000 – $500,000)

New AGI $350,000

($325,000 + $25,000 taxable gain)

Excess of AGI over $250,000 $100,000

($350,000 – $250,000)

Lesser Amount

(Taxable) $25,000 (Taxable gain)

Tax Due $950

($25,000 x 0.038)

See Kenneth Harney's article and Health Reform scenarios at Realtor.Org.

Please consult your tax advisor for information that directly pertains to your situation.