FEATURE STORY
Health Care Tax Changes to Have Little Impact on Principal Residence Sellers
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mong the many policy changes in the recently enacted health care legislation, builders and the residential construction industry should be aware
of two tax policy changes in particular:
New Tax on Capital Income
Set to take effect in 2013, a 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 new 3.8% Medicare tax on so-called unearned income 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
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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%).
Small Employer Insurance Tax Credit
For 2010, the legislation establishes a tax credit for certain small businesses that provide health insurance. In general, the credit is available for businesses that pay at least half the cost of health insurance for their employees.
Partial tax credits are available for small businesses with no more than 25 full-time employees and whose employees have average wages no higher than $50,000. Full tax credits are available for businesses with no more than 10 full-time employees with average wages not exceeding $25,000. The maximum credit amount is equal to 35% of the employer's qualified health insurance expenses.
The credit will be available for tax years 2010 through 2013. After 2013, the credit will only be available for a maximum of two years and only for employers that purchase health insurance for their workers via a state exchange, as provided in the new legislation.
Visit
http://bit.ly/9IjfMG for an IRS list of frequently asked question and answers. For more information, contact Rob Dietz at
rdietz@nahb.org or (800) 368-5242 x8285.
MAY 2010 | HOUSTON BUILDER | GREATER HOUSTON BUILDERS ASSOCIATION – BUILDING A BETTER FUTURE
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