The 3.8% Tax effective January 1, 2013
Beginning January 1, 2013, a new 3.8 percent tax on some investment income
took effect. Since this new tax affects some real estate transactions, it is important for you to clearly understand the tax and its impact. It is a complicated tax, so you won’t be able to predict how it will affect every buyer or seller.
The tax was passed by Congress in 2010 with the intent of generating
an estimated $210 billion to help fund President Barack Obama’s health care and Medicare overhaul.
Understand that this tax WILL NOT be imposed on all real estate transactions,
a common misconception. Rather, when the legislation becomes effective in 2013,
it may impose a 3.8% tax on some (but not all) income from interest, dividends,
rents (less expenses) and capital gains (less capital losses). The tax will fall only
on individuals with an adjusted gross income (AGI) above $200,000 and couples
filing a joint return with more than $250,000 AGI.
The new tax applies to: .
Individuals with adjusted gross income (AGI) above $200,000
Couples filing a joint return with more than $250,000 AGI
Types of Income: Interest, dividends, rents (less expenses), capital gains
(less capital losses)
Formula: The new tax applies to the LESSER of Investment income amount
Excess of AGI over the $200,000 or $250,000 amount
Another way of thinking about these new taxes is to think of the 3.8% tax as being imposed on a portion of the money that you make on your money — your capital (sometimes referred to as “unearned income”). The 0.9% tax is imposed on a portion of the money you make on your labor — your salary, wages, commission and similar income related to earning a livelihood.
These FAQs can answer most of the questions not covered in these examples.
No separate brochure has been prepared on the 0.9% tax, as it has none of
the complexity associated with the 3.8% tax.
(Reprinted from TAR / Realtor.com)