New 3.8% Tax On Net Investment Income (Including Home Sales)

Beginning January 1, 2013:

The healthcare reform bill added a new chapter to Subtitle A of the Internal Revenue Code, Chapter 2A.

Chapter 2A imposes a tax on individuals equal to 3.8% of the lesser of

(A) net investment income, or

(B) the excess (if any) of the (i) modified adjusted gross income (“MAGI”) for such taxable year, over (ii) the threshold amount. Thus, if your MAGI does not exceed the threshold amount, you do not owe this tax.

“Threshold Amount” means—(1) in the case of a taxpayer making a joint return or a surviving spouse, $250,000, (2) in the case of a married taxpayer (as defined in section7703) filing a separate return, 1⁄2 of the dollar amount determined under paragraph (1), and ‘(3) in any other case, $200,000. These amounts are not set to adjust with inflation.

“Net Investment Income” The term ‘net investment income’ means the excess (if any) of—(A) the sum of—(i) gross income from interest, dividends, annuities, royalties, and rents, other than such income which is derived in the ordinary course of a trade or business not described in paragraph (2), (ii) other gross income derived from a trade or business described in paragraph (2), and (iii) net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property other than property held in a trade or business not described in paragraph (2), over (B) the deductions allowed by this subtitle which are properly allocable to such gross income or net gain.

Trade or business described in paragraph (2)—A trade or business is described in paragraph (2) if such trade or business is— (A) a passive activity (within the meaning of section 469 with respect to the taxpayer), or (B) a trade or business of trading in financial instruments or commodities (as defined in section 475(e)(2)).

You can find the text of the new law PL 111-152 s 1402.

For a good article on how this would apply in the sale of a home context, see‘s article.

For another article, see this MarketWatch Article.

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