Is There a New 3.8% Tax on the Sale of My Home?
The New Medicare Surcharge
Several people have told me that they have heard about a new 3.8% tax on the sale of their home. For almost everyone, this is not true. Here are the facts:
Your salary or wages are currently being taxed 2.9% for Medicare. (You pay 1/2 and your employer pays 1/2.) Beginning 1/1/13, the Medicare tax has expanded to include "unearned" income, which is interest, dividends, capital gains, and most rental income, and the rate will be 3.8%
The expanded Medicare tax will only apply if your Adjusted Gross Income (AGI) is more than $200,000 for a single person or $250,000 for a married couple filing a joint return. The Medicare tax applies to the amount of your income over the threshold, or the amount of your unearned income, whichever is less. (AGI is usually your total income minus a few items, such as tax-deductible IRA and SEP-IRA contributions, alimony paid, and self-employed health insurance premiums.)
If your AGI is more than the threshold amount, does the Medicare tax apply to you? Here are some things to keep in mind:
1. Items which are nontaxable for regular tax are also not taxable for the Medicare surcharge. So the $250,000/$500,000 exemption for gain on the sale of your home also applies for the Medicare tax. For any part of the sale of your home to be subject to the Medicare surcharge, both of these things must be true:
A) Your AGI is over the $200,000/$250,000 threshold, and
B) The profit on the sale of your home is more than the $250,000/$500,000 exemption.
2. Most rental properties show a loss for tax purposes, so rents received will usually not be subject to the Medicare surcharge.
3. If you are in the happy position of selling assets (stocks, bonds, real estate) at a profit, you may want to sell any other assets which are showing a loss. The Medicare surcharge applies only if you have a net gain.
Planning for the Medicare Surcharge
If you anticipate that your AGI is going to be more than $200,000 for a single person, or more than $250,000 for a married couple filing together, here are some things you can do to avoid or at least minimize the Medicare Surcharge:
1. If you are selling real estate, consider arranging an installment sale. The profit may be recognized as you collect the payments, instead of all in the year of sale, helping to keep your total income below the threshold each year.
2. If you are selling real estate, but not your home, at a large profit, consider arranging a tax-free exchange into another property instead.
3. If you are receiving large amounts of interest income, consider moving to municipal bonds. Interest from municipal bonds is usually not subject to federal taxes.
4. If your rental property is showing a profit for tax purposes, consider increasing the mortgage. The increased interest expense will lower your net profit. If you are uncomfortable increasing your overall debt, consider using the loan proceeds to pay down the balance of your home mortgage.
Before making decisions which involve substantial amounts of money, I strongly recommend that you consult your tax professional. There are additional important tax laws to consider in addition to the Medicare surcharge.
If you have questions / comments, or wish to enlist the services of an experienced CPA tax accountant, please contact me.
M Bess Kane, CPA