Money Matters

2013 surtax would affect very few home sales

CorrespondentMay 22, 2011 

  • Some examples of how the new surtax will affect various taxpayers:

    Single filer with $150,000 of salary and $30,000 of net investment income, for modified adjusted gross income of $180,000: The 3.8 percent surtax does not apply because MAGI is less than $200,000.

    Any filer with no net investment income: The 3.8 percent surtax will not apply because the filer has no investment income.

    Married filer with $350,000 of salary, a $200,000 profit from a primary home sale and no net investment income: The 3.8 percent surtax will not apply because the profit is less than the capital gain exclusion amount and the filer has no net investment income.

    Married filer retired with no salary but net investment income of $240,000: The filer is not subject to the surtax. The following year the filer has the same investment income and a $20,000 distribution is taken from an IRA, for a MAGI of $260,000. Now, $10,000 of MAGI is over the threshold and is subject to the 3.8 percent surtax.

Q: I've heard that in 2013 as part of the new health plan there will be a new tax on those married filing jointly making more than $250,000 beginning.

We are now lucky or unlucky enough to have earnings of about $350,000. For many years we struggled financially, made sacrifices and took risks and only recently have begun making a good living. Our earnings from our business finally rose two years ago, just in time to prevent our oldest child from qualifying for any college financial aid.

We had planned to sell our current home two years from now when our youngest child goes off to college. We have lived in the same house for more than 20 years, so even with the housing downturn we anticipate making a nice profit when we sell.

The tax I've heard about is 3.8 percent on unearned income, including capital gains. That's almost as much as the real estate commission!

We don't think housing prices will increase very much in the next few years, so should we sell before 2013 to avoid the tax? If we sell next year, we know of a way our son will be able to remain in the same high school even if we buy a house in another district, so that is not a concern.

A: It has been difficult to plan based on what is going to happen with tax law.

There is a strong argument for taking steps now to position yourself in the best way possible financially because we know the current tax laws and can't predict the future.

With the budget deficit, higher taxes and fewer tax breaks, especially for the "wealthy," are predicted. The definition of wealthy seems to be anyone single with an adjusted gross income in excess of $200,000 and a married couple with an AGI in excess of $250,000, regardless of their financial responsibilities and prior earnings.

The marriage penalty exists under the current tax code, but it gets worse in 2013. Because you own your own business, you could get a divorce, split your earnings so you each have an income of $175,000 and the new taxes won't affect you. Just kidding! But it is irritating that a married couple face higher taxes than two singles with the same income.

When the tax applies

Knowing the details on the 3.8 percent tax may eliminate your concern about when to sell your home. In 2013, the Medicare tax for singles filers with an AGI in excess of $200,000, married filers with an AGI in excess of $250,000 and married filing separately with an AGI in excess of $125,000 will be increased to 3.8 percent and expanded to cover both wage income and investment income.

The official name for this tax is "unearned income Medicare contribution tax," and it is one of the provisions of the Patient Protection Affordable Care Act. The tax will be on the lesser of net investment income or the excess of modified adjusted gross income over a threshold amount.

Investment income includes interest, dividends, capital gains, annuities, rents, royalties and passive activity income. Net investment income is the excess of gross investment income over allocable investment expenses. "Modified adjusted gross income" is the sum of AGI (Form 1040 line 37) plus any net foreign income exclusion amount. Some examples are provided in the adjoining chart.

If the existing home sales exclusion remains, only a few will be affected by this tax because of the sale of a primary residence. As for now, the capital gain exclusion amount on a principal residence meeting the ownership and use tests is $250,000 for individuals and $500,000 for couples. Any gains within those limits will not be subject to this new tax.

If the profit from the sale were to exceed those limits, the tax would apply to the portion of the profit above the exclusion amount.

Holly Nicholson is a certified financial planner in Raleigh. Reach her at or P.O. Box 99466, Raleigh, NC 27624. She cannot answer every question.

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