The tax impact of the 2010 Health Reform Legislation

Naseem Punnilath, CPA

Frank, our principal, was asked a question at his coffee group a few weeks ago about rumors of a new 3.8% tax on home sales. Hopefully this article will shed some light on this gloomy subject.

Under the provisions of the recently enacted health reform legislation, beginning in 2013, some tax payers will pay an additional 3.8% Medicare Tax on net investment income.

Beginning in 2013, Medicare taxes will, for the first time, be levied on investment income. This 3.8% tax will be imposed on net investment income of single, joint, and separate filers with AGI over $200,000, $250,000 and $125,000 respectively. Net investment income is composed of interest, dividend, royalties, rent, gross income from a trade or business involving passive activities, and net gain from sale of property held for investment purposes.

For example, if a married couple with AGI over $250,000 sells their principal residence in 2013 (assuming the sale meets the conditions of the $500,000 exclusion of gain), the 3.8% tax will be imposed on the amount of gain over $500,000. In the same example if the couple were to sell their vacation home, all of the gain from such sale would be subject to the 3.8% tax.

Tax planning ideas: Taxpayers who expect to have net investment income (including a gain over the excludable limits from the sale of their principal residence or gain on sale second home) should analyze the costs and benefits of selling prior to 2013.

Planning on rolling over your regular IRA to a Roth? Consider the tax effects of doing so prior to 2013 to avoid ending up with a higher AGI.

We can expect the IRS to make refinements and clarifications prior to this new tax, on investment income, taking effect. Beginning in 2013, in addition to the current 1.45% Medicare tax on wages, an additional 0.9% will be imposed on wages over, $200,000 for single individuals, $250,000 for joint filers and $125,000 for separate filers. This tax will be increased to 3.8% for Self-employed individuals on earnings over these limits.

These thresholds are not indexed for inflation. Therefore over time more tax payers will be subject to these taxes.