Clarification: A New 3.8% Tax on Unearned Investment Income

We have gotten a few questions regarding this topic in the last few weeks and thought we'd address it here.  Take it away, Bob!

The health care reform legislation does indeed contain a new 3.8% tax on unearned investment income. However, that tax applies only to individuals who earn $200,000 or more ($250,000 for families) and applies to tax years beginning after December 31, 2012.

Misinformation surrounds how the tax will apply to the sale of a home. For the tax to have any impact the $200,000/$250,000 income threshold must be exceeded (thereby excluding the vast majority of Americans). Then the tax would apply only to the taxable net profit from the sale of a home. For example, let’s say you bought a home for $150,000 ten years ago and since then you made improvements equal to $150,000 (new kitchen, new roof, etc.). Now your cost basis is $300,000. There is currently a $250,000 exclusion for a single taxpayer ($500,000 for a married couple) for the taxability of profit on the sale of a home (if you lived in the house for a minimum period – generally 24 months out of the last 5 years). So, in this example, you could sell the home for up to $550,000 (single taxpayer) or $800,000 (married) and have no taxable profit and thus the 3.8% tax would not apply.

Perhaps the two most controversial aspects of this section of ACA is that the income thresholds are not indexed (so that over time more folks will be impacted by the tax) and that the revenue generated by this “Medicare contribution” will not be applied directly to Medicare (but will instead fund the overall healthcare reform program).

For what it's worth, here’s what the law says:
www.ncsl.org/documents/health/ppaca-consolidated.pdf