By Patrick J. Murphy
With the passing of the health care bill, there are a number of new tax code provisions and many people are concerned about how these new provisions will affect them. One of these new tax code provisions is the 3.8% Medicare tax that applies to “net investment income,” which is such items as interest, dividends, annuities, royalties, rents, and net gain on the sale of property (like your primary residence). One of the misconceptions about the new 3.8% Medicare tax is that it will affect a number of people when they sell their primary residence for a gain. Fortunately, this new tax will only affect a small percentage of people who are high income taxpayers.
One reason the new tax will not impact many taxpayers is the current exemption for gain on the sale of your primary residence. For single individuals, they are able to exclude the first $250,000 in gain from the sale of their primary residence. For married couples, the first $500,000 in gain from the sale of their primary residence is excluded. As a result, depending upon the taxpayer, the first $250,000 or $500,000 may be excluded from gross income and would not be subject to the 3.8% tax. The only individuals who should be concerned about the 3.8% Medicare tax is individuals who sell a second home or a have a very large gain on the sale of their primary residence.
Another reason that the new 3.8% Medicare tax will not affect many people is that it only applies to high income individuals. The tax will only be incurred when a single individual has adjusted gross income over $200,000 or when a married couple filing jointly has adjusted gross income over $250,000. Only a small percentage of taxpayers earn incomes over these threshold amounts, even for taxpayers who sell their primary residence for a gain over the $250,000/$500,000 exemption.
Therefore, due to the $250,000/$500,000 income exemption and the tax’s income thresholds, the only individuals who will be affected by this tax are high income taxpayers. If you believe you may be subject to the 3.8% Medicare tax due to a sale of your primary residence or otherwise, it is important that you speak with your tax attorney or accountant to develop a tax planning strategy to minimize the impact of this new tax. The goal behind the tax planning will be to minimize your adjusted gross income through such strategies as recognizing losses at the time you sell your primary residence or purchasing municipal bonds which pay tax-exempt interest. Through proper planning, you can minimize the impact of this new tax.
02/15/11 5:00 AM
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