Healthcare Legislation Upheld – 3.8% Investment Income Tax Effective in 2013

Now that the U.S. Supreme Court has upheld the health care legislation, all of its major provisions remain in effect, including the new 3.8% tax that was designed to affect upper income taxpayers. Not long after the tax was enacted in 2010, erroneous and misleading documents went viral on the Internet and created a great deal of misunderstanding and made the tax into something far more draconian than the actual provisions.  It is important for Houston REALTORS® and homeowners to remember the 3.8% tax does NOT apply to the sale of all homes.

The 3.8 tax will go into effect on January 1, 2013 and will be imposed ONLY on those taxpayers with more than $200,000 of Adjusted Gross Income (AGI) ($250,000 on a married couple’s joint return).  The tax applies to investment income, defined as interest, dividends, capital gains and net rents.  These items are all included in an individual’s AGI.  A formula will determine what portion, if any, of these types of investment income would be subject to the tax.The new tax does NOT eliminate the benefits of the capital gains exclusion on the sale of a primary residence of $250,000 for single taxpayers and $500,000 for married couples filing jointly. Thus, ONLYthat portion of a gain above those thresholds is included in AGI and could be subject to the tax.REALTORS® should familiarize themselves with the tax, but should not advise their clients about the application of the tax. The amount of tax will vary from individual to individual because the elements that comprise AGI differ from taxpayer to taxpayer.