Monday, October 8, 2012

What is the 3.8% Tax on Investment Income?


It’s enough of a shock that 2012 is nearing its end.  Where did the year go?  As we finish up the last few months of this year, it’s important to note a new tax that will go into effect on January 1, 2013.  It’s a brand new 3.8% tax on some investment income—and trust me, it’s a bit complicated.

How will this new tax affect your day-to-day life?  What should you prepare for?  And what do you really need to know about the 3.8% tax on investment income?  Team Ohlde is here to answer all of your questions.

What is the 3.8% tax?
It’s a misconception that the 3.8% tax will be imposed on all real estate transactions.  That is not the case.  In fact, the tax that will begin on January 1, 2013 will impose tax on “unearned income” such as investments, rental income and home sale profits over a certain exemption amount.

Myth vs. Fact
Recently, MSN Money put together a list of myths and facts about the 3.8% tax.  Read on to find out what’s true and what’s false:

  • MYTH:  Tax will affect all homes or even most home sales.  FACT:  It is not a tax on total sales price.  It is also not a sales tax. 
  • MYTH: The National Association of Realtors is working to get the tax repealed.  FACT: The association, instead, is trying to counteract what people call “grossly inaccurate” rumors about the levy.
  • MYTH: The tax will only affect the very rich.  FACT: In some circumstances, the tax could affect people who are not considered extremely wealthy.  


Does the 3.8% tax apply to everyone?  
No—in fact, the tax will only fall on individuals with an adjusted gross income (or AGI) above $200,000.  It also affects couples filing joint returns with more than $250,000 AGI.

Why is the 3.8% tax going into effect?
In 2010, Congress passed the 3.8% tax in order to generate an estimated $210 billion (over 10 years) to help fund President Barack Obama’s health care and Medicare overhaul plans.

So how will this affect me?
As mentioned earlier, the 3.8% tax will only affect those with over $200,000 AGI (or $250,000 AGI for couples).  In addition, it will only tax income from interest, dividends, rents and capital gains.  To view various scenarios of how this could potentially affect you, please read The 3.8% Tax: Real Estate Scenarios & Examples, distributed by the National Association of Realtors.  The brochure will give insight to those looking for more information on capital gain, securities, rental income, sales of second homes, etc.

What should I do?
If you think you (or even your parents) could be subject to this new tax, it might be smart to sit down with a tax professional to talk about alternatives. Consider closing a home sale before December 31, 2012—or selling investments that could trigger the tax—that could save some money.  The best next step is to meet with a tax professional to determine if action is necessary.

What is the real estate industry’s view on the tax?
As a matter of fact, the NAR expressed strong objections against the tax when it was first proposed in March of 2010.  Legislation decided to pass the tax due to the party line vote.  It's not true that the National Association of Realtors is working to get the tax repealed. In fact, the association has been trying to counteract what a spokeswoman called "grossly inaccurate" rumors about the levy.