The Official Online Weekly Newspaper of NAHB
More than six months after health care legislation was enacted (click here, for a story in the April 5 issue of NBN), builders and the residential construction industry continue to wrestle with false rumors circulating the Internet that the new 3.8% Medicare tax on so-called unearned income set to take effect in 2013 is a straight tax on the sale of a home.
This is not the case.
The tax increase on capital income — such as capital gain and rents — will affect some real estate investments. However, it should have a negligible impact on sellers of principal residences.
The 3.8% Medicare tax will affect high-income taxpayers who report taxable income due to capital gains and other non-wage income. It will not affect income that is currently tax-exempt, including most capital gain due to the sale of a principal residence (due to the $250,000/$500,000 gain exclusion rules). Taxpayers with less than $250,000 in income will not see any increase in tax.
Under prior law, Social Security and Medicare benefits are financed by payroll taxes on wages. The tax is equal to 12.4% of covered wages up to a maximum amount ($106,800 in 2010), with half paid by the employer and half paid by the employee; and 2.9% of covered wages uncapped, again with half paid by the employer and half paid by the employee. Self-employed individuals — including independent contractors — generally pay both the employee and employer parts of the tax. Unearned income (e.g. rents, dividends, interest and capital gains) were not subject to these taxes.
As a result of the Patient Protection and Affordable Care Act of 2010, this system is changing. Under revised law, the Medicare tax will increase for taxpayers earning more than $250,000 (if married) or $200,000 (if single). In particular, the individual’s Medicare portion of the tax — which was previously 1.45% or half of the 2.9% — increases to 3.8%, but only for certain income amounts. The rate of 3.8% applies to the smaller of: (1) the amount of income above $250,000/$200,000 of modified adjusted gross income; or (2) net investment income. The tax also applies to self-employed individuals.
Net investment income is the sum of income from interest, dividends, annuities, royalties, rents and capital gain — except income derived from active participation in a trade or business, including sole proprietorships, partnerships and S Corporations.
As noted earlier, tax-exempt unearned income (excluded gain from the sale of a principal residence or interest income allocable to a tax-exempt bond) is not subject to this new tax.
Here are two examples:
Suppose a couple has wage income of $260,000 and $9,000 in capital gains. The extra 3.8% tax applies to the smaller of $19,000 (the difference between $269,000 and $250,000) and $9,000. $9,000 is smaller, so the increased tax is equal to $342 ($9,000 times 3.8%).
Suppose a couple has wage income of $50,000 and gains income of $210,000. The extra 3.8% tax applies to the smaller of $10,000 (the difference between $260,000 and $250,000) and $210,000. $10,000 is smaller, so the increased tax is equal to $380 ($10,000 times 3.8%).
For more information, e-mail Rob Dietz at NAHB, or call him at 800-368-5242 x8285.
The Fall Construction Forecast Conference (CFC) Webinar will feature three distinct perspectives on the housing industry and its near- and long-term future. The webinar will be held from 2:00-4:00 p.m. EDT on Wednesday, Oct. 27.
Speakers David Crowe, NAHB chief economist; Eric Belsky, managing director with Harvard University’s Joint Center For Housing Studies; and Maury Harris, managing director and chief U.S. economist with UBS, will present the latest economic data and opinion in a streamlined, efficient format that will enable attendees to interact directly with them.
The fee is $29.95 for NAHB members and home builders associations and $49.95 for non-members.
For more information and to register, visit www.nahb.org/cfc.
Housing and economics followers can get the latest economics and housing policy news, analysis, studies, charts and graphs from NAHB’s free new blog, “Eye on Housing,” at http://eyeonhousing.wordpress.com.
Featuring NAHB Chief Economist David Crowe, as well as observations and comments from NAHB economists Bernie Markstein, Paul Emrath, Robert Dietz, Peter Grist and Robert Denk, the blog also includes links to relevant housing stories and information from other news sources.
Blog entries will be updated on a regular basis as the news related to housing occurs. The blog also will replace the content in NAHB’s Eye on the Economy. While subscribers will still receive their regular issues of Eye on the Economy, the e-newsletter will serve primarily as a digest of the content featured on the "Eye on Housing" blog.
Readers can either visit the free blog directly at http://eyeonhousing.wordpress.com, or subscribe to the RSS feed on the blog to have the latest entries sent to them as they are posted.
Want to Know Your State’s Starts Forecast for 2010-2011?
Find out in HousingEconomic.com’s State Starts Forecast (sample).
The starts forecast include downloadable Excel tables of total, single-family and multifamily starts by region and state.
To learn more, visit www.housingeconomics.com.