In 2010 I wrote 2 blogs regarding the 3.8% Surtax and how it would work. I don’t think many paid much attention to it because it was a few years out. The fate of the 2010 Healthcare Act is in the Supreme Courts hands in June. If the court decides the Act is constitutional then the 3.8% Surtax is something we all have to look forward to. Let’s revisit what the 3.8% Surtax means to us.
Here are my thoughts from April 7, 2010:
The 2010 Healthcare Act has generated a lot of questions. Over the course of the next few weeks I thought I would share with you some of the questions that I have been asked and the answers I have found. This week I was asked the definition of “unearned income” and how it applies to the 3.8% surtax levied to help pay for insuring all of America.
My initial thought was unearned income is usually dividends and interest, but the first place I looked to confirm this thought included the word “investments”. Investments to me mean rental real estate and partnerships that people are passively involved in. Could the intention really be to tax that income at 3.8%?
After pondering that for a while, I decided it wouldn’t be that bad because most rentals report a loss after they factor in depreciation expense. But the ugly truth reads like this…..
Net investment income for surtax purposes is interest, dividends, royalties, rents and gross income from trade or business involving passive activities and net gain from disposition of property (other than property held in trade or business). If I am reading this right it means that if you receiving passive income from a partnership you formed for your rental properties then you will be subject to the 3.8% surtax on the GROSS INCOME. As with all things having to do with the tax code there is a formula. So the first step is it only applies to you if you are a high income wage earner. That magic number if you are married filing joint is $250,000. The next step would be to determine what your Adjusted Gross Income is. That would be the amount on the last line of page 1 of your Form 1040. Multiply the amount over $250,000 by 3.8%. Next add up your investment income and multiply that by 3.8%. Next compare those two amounts; whichever is the smaller amount is the surtax you will pay.
And here are my thoughts from September 29, 2010:
There is an email making the rounds that says that the sale of your personal residence will be subject to the 3.8% surtax. It states that on a home sale of $200,000 the tax will be $7,600! Can this be true?
Well let’s tear it apart. The 3.8% surtax will apply to unearned income. A sale of a personal residence certainly qualifies for that. However the 3.8% surtax only applies if your adjusted gross income is $250,000 or more.
Next let’s look at the home sale itself. When a home is sold you take the sales price and subtract the cost of purchasing the home to come up with the gain. Next you apply the home sale exclusion, which says if you have owned your home for 5 years and have lived in it for 2 of those years you can take a $500,000 gain exclusion if you are married or $250,000 if you are single.
Now let’s add the two parts together. First you have to have an AGI of $250,000 or more, and then you must have sold your house for a gain of more than $500,000 for this rule to apply. If those 2 rules apply to you then you will have pay a 3.8% surtax on either the excess of income over the $250,000 AGI or on all your unearned income whichever amount is smaller.
So what do you think? Anybody else a little worried that this and many other parts of the 2010 HealthCare Act are going to get put into action?