Medicare Surtax on Investment Gains

by | Apr 2, 2012 | Tax Planning, Weekly Column

Ronald Reagan was noted for saying, “Trust but verify.” And that was before Al Gore invented the Internet. When it comes to believing forwarded emails with dire warnings, it’s a good idea to go even further and “Verify before trusting.”

Here are a few lines from an email I’ve received numerous times over the past two years: “Did you know that if you sell your house after 2012 you will pay a 3.8% sales tax on it? That’s $3,800 on a $100,000 home . . . It’s in the health care bill and goes into effect in 2013. . . . Under the new health care bill all real estate transactions will be subject to a 3.8% Sales Tax. If you sell a $400,000 home, there will be a $15,200 tax.”

Before trusting this, I verified it with Paul Thorstenson, an accountant with Ketel Thorstenson in Rapid City, South Dakota. He said, “The information in this email is nearly entirely false.”

As with a lot of what you read on the Internet and hear from politicians, if you sift through the rubbish in this statement you will find a few grains of truth.

First the truth. There is a 3.8% Medicare surtax contained in the health care act passed by Congress and signed into law by President Obama in 2009. It does take effect in 2013.

Now the falsehoods. This is not a sales tax. Sales taxes apply to the gross sale price of an item. Thorstenson explained this is a surtax that only applies to a gain (not the sales price) on sale of an investment asset. This not only includes real estate, but other investments like stocks, bonds, mutual funds, commodities, precious metals, and collectables. The surtax will also apply to other passive and investment income, such as interest, dividends, and net rental income.

The act only applies the surtax to investment gains when the total adjusted gross income on a return exceeds $250,000 for couples and $200,000 for single taxpayers. If your adjusted gross income is less than those amounts, the surtax will not apply.

If you sell a primary residence, the surtax will not apply to the first $500,000 of gain for couples or the first $250,000 of gain for individuals (IRS Code Section 121). “The surtax will only apply if the gain is above $500,000,” explained Thorstenson, who added, “And who even has a gain in a home these days, let alone over $500,000?”

What is important to note is there is no Section 121 exclusion on the gains of vacation homes, second homes, or rental property. So if your adjusted gross income tips over $200,000 for individuals and $250,000 for couples in the year you sell an investment like a mutual fund, rental property, second home, or small business, you will be hit with a 3.8% tax on the portion that exceeds the $200/$250 threshold.

Now consider what happens if President Obama gets his way and raises the capital gains tax to 28% on taxpayers earning over the $200/$250 limits. You could easily see the capital gains rate more than double from 15% to 31.8%. On every $100,000 of gain, that means a tax increase from $15,000 to $31,800.

Thorstenson told me, “This law is an atrocity in my opinion. It is an attack on successful investors, and the tax revenues aren’t even earmarked for Medicare. The proceeds just go into the general fund.”

The truth about this surtax is bad enough without believing exaggerations about it. The next time this particular email shows up in your inbox, just delete it. Trust me; I verified.

Print Friendly, PDF & Email