How the 3.8% Tax Works on the Sale of your Ann Arbor Home
Here is how the 3.8% tax increase will work, if you have a gain of less than $250,000.00 for single payers and $500,000 for joint payers you will not be taxed. It does NOT override the Federal Income Tax Law.
However, if you have owned your home for many years, and make $600,000.00, then your taxes would be increased 3.8% on the gain from the sale of your home starting January 1, 2013 . In this scenario you would pay 3.8% or $3,800.00 on the gain over $500,000. For a single filer it would be anything over the $250,000.00 level.
If you purchased your home for $200,000. and are single, and sell it for $300,000. then your additional 3.8% tax liability could potentially be $3800.00 used to fund Medicare.
I know the tax increase doesn’t apply to that many people, less than 2% nationwide, but for Ann Arbor home sellers, it is still a tax increase written into the Health Care Bill that many Ann Arbor home sellers may not know about. We live in a fairly wealthy community in Ann Arbor so this 3.8% tax increase will potentially apply to more.
The 3.8% tax increase is for Medicare
The revenues generated from this 3.8% tax increase will be allocated to the Medicare Trust Fund that is part of the Social Security System. That fund is currently on shaky financial footing.
The Medicare tax hike would for the first time incorporate filing status into each person’s Medicare tax liability, and also for the first time, the Medicare tax will not apply just to wages but also to investment income such as income from capital gains, dividends, interest and rental property. In its first year of application, 2013, the new Medicare tax will hit approximately the top-earning two percent of families.
According to the National Association of Realtors, “The new 3.8% Medicare tax includes in the Health Care bill is assessed only when Adjusted Gross Income (AGI) is more than $200,000/$250,000. AGI includes net income from interest, dividends, rents and capital gains, as well as earned compensation and several additional forms of income presented on a Form 1040 Income Tax Return.
The tax is NOT imposed on the total AGI, nor is it imposed solely on the investment income. Rather, the taxable amount will depend on the operation of a formula. The taxpayer will determine the LESSER of (1) net investment income OR (2) the excess of AGI over the $200,000/$250,000 AGI thresholds. Thus, if net investment income is the smaller amount, then the 3.8% tax is applied only to the net investment income amount. If the excess over the thresholds is the smaller amount, then the 3.8% tax would apply only to the excess amount.
If you would like me to I would be glad to send you a pdf file published by the National Association of Realtor where you can read about different scenerio’s for investment properties, vacation homes etc..
Just send me an email or leave it in the comments below. There have been a lot of rumors circulating about this 3.8% tax increase on the sale of your home, let me know if you need the document.