July 13, 2012 - written by Utah Real Estate Professionals
Oh, TAXES! Just when we were getting used to the relatively recent changes to the Capital Gains Tax, Uncle Sam throws something new our way for 2013. Certain “high end” taxpayers will begin paying a new Medicare Tax on “unearned” income. Under the Patient Protection and Affordable Care Act, this new tax will be based upon the LESSER of:
1. the taxpayer’s net investment income, or
2. Any excess of modified adjusted gross income (MAGI) over
· $200,000 for single taxpayers;
· $250,000 for married filing jointly; or
· $125,000 for married filing separately.
So let’s take a closer look at this and see what it could mean for you.
WHAT IS BEING TAXED
Remember, the tax does NOT apply to wages or business income, only investment income such as:
- · gross income from interest, dividends, annuities, royalties, or rents (except those coming from an active business)
- · net gain earned from selling or otherwise getting rid of investment or other non-business related properties, and
- · any other gain from passive trade or business.
FOR EXAMPLE:
Bob and Sue are married and filing their taxes jointly. Their MAGI is $300,000 and includes $100,000 from selling their investment property. The MAGI threshold for a married filing jointly couple is $250,000, so they must pay the 3.8% tax on the $50,000 overage. The tax will add up to $1,900.
REAL ESTATE APPLICATIONS:
If you are single and your income is over $200,000 ($250,000 for married homeowners), you may feel the effect of the tax when you sell. If you are able to sell for a large profit, you will have to pay the tax on the difference.
Here’s another example:
You are married and purchased your home for $250,000. You were able to sell it for $750,000 (we can all dream, right?!). Your $500,000 profit, minus the $250,000 exclusion, yields an investment income of $250,000.
Your annual earnings are $100,000, plus the investment income of $250,000 equals a MAGI of $350,000. If you subtract the allowance for married-filing-separately, you are left with $100,000 that is subject to the 3.8% tax. That is an extra $3,800 in taxes for selling your home after 2013.
WHAT SHOULD YOU DO?
Contact your tax professional today if this sounds like your situation! We project there may be an increase in homes being sold before the end of 2012 to avoid this tax. If you are interested in listing your home for sale, give ua a call and we can help you through the entire process!
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