The 3.8 Percent Medicare Tax Beginning 1/1/2013 is NOT on All Property Sales.

Despite what you may have read, this tax is NOT on all real estate sales. The criteria for the tax does not, or will not  affect every homeowner across the board.

First, this tax is not aimed at homebuyers. The new 3.8 percent "Medicare tax" is on unearned income, and translates to an additional tax for homesellers only , and  further,  only under the following circumstances:

The new tax applies only to:

• Single taxpayers with a modified adjusted gross income (MAGI) in excess of $200,000 ,and

• Married taxpayers with a MAGI in excess of $250,000 if filing a joint return, or $125,000 if filing a separate return.

These taxpayers  pay the tax on their gain from the sale of their primary residence, but only on the amount of gain that exceeds the  $250,000 thresholds  for single taxpayers, and  $500,000 for joint tax returns.  

The tax is equal to 3.8% of the lesser of the taxpayers’ “net investment income” or the amount by which their MAGI exceeds their respected  threshold. Note the following example, offered by Realtor.org-

"John and Mary sold their principal residence and realized a gain of $525,000.
Th ey have $325,000 Adjusted Gross Income (before adding taxable gain).
Th e tax applies as follows:
AGI Before Taxable Gain $325,000
Gain on Sale of Residence $525,000
Taxable Gain (Added to AGI) $25,000 ($525,000 – $500,000)
New AGI $350,000 ($325,000 + $25,000 taxable gain)
Excess of AGI over $250,000 $100,000 ($350,000 – $250,000)
Lesser Amount (Taxable) $25,000 (Taxable gain)
Tax Due $950 ($25,000 x 0.038)

If John and Mary had a gain of less than $500,000 on the sale of their residence,
none of that gain would be subject to the 3.8% tax. Whether they paid the 3.8% tax
would depend on the other components of their $325,000 AGI."

If you have any questions about this tax, and whether it applies to you, please consult your accountant.

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