Tag Archives: taxes

How the New 3.8% Tax Works

The 3.8% tax on net investment income beginning Jan. 1 applies to dividends, interest (except from municipal bonds), net capital gains, rents, royalties and investment annuities for most joint filers with adjusted gross income of $250,000 or more ($200,000 for singles).

Example: A couple has adjusted gross income of $240,000, not counting their investment income. If they have $2,000 of interest, $4,000 of dividends and $1,000 of net capital gains, the 3.8% tax won’t apply. But if they have the same interest and dividends plus a $10,000 net capital gain, then they’ll owe a new tax of $228 on $6,000, the amount of their investment income above $250,000.

Things get more complex for retirees. Defined-benefit pension payments and individual retirement account payouts aren’t themselves subject to the 3.8% tax, but they can raise adjusted gross income.

Example: A widow has $210,000 of adjusted gross income from pensions and IRA withdrawals, so she doesn’t owe the new tax even though that income is above $200,000.

But if instead she has $120,000 from pensions and IRA payouts, plus a $100,000 net taxable gain from the sale of her home—after subtracting her cost basis and the $250,000 exclusion—then she will owe $760 of new tax on $20,000.

“For people under the thresholds, the timing of investment income will become very important,” notes Sharon Kreider, a CPA in Sunnyvale, Calif., who has studied the new levy.

By: Laura Saunders, Wall Street Journal

Limit on Mortgage Interest Deduction Would Penalize Only a Minority of Taxpayers


The idea of limiting the homeowner mortgage interest deduction came up in two of the presidential debates, but specifics about who would be affected and how much they might lose in tax benefits were minimal. To put some rough numbers on the issue, here’s a quick primer on the mortgage interest deduction and related housing write-offs.

How big are they? Very big — which is why they have become such a tempting revenue-raising target for candidates seeking to reduce the massive federal deficit. According to estimates from the congressional Joint Committee on Taxation, the mortgage interest deduction alone will “cost” the federal government $484.1 billion between fiscal 2010 and 2014, including $98.5 billion in 2013 and $106.8 billion in 2014. Homeowners’ write-offs of local and state property taxes account for another $120.9 billion during the same five-year period.

Keep in mind: What “costs” the federal government also represents significant tax savings for the people who take the deductions — in this case, the millions of homeowners who save thousands of dollars a year that they are not paying to the IRS. In fact, according to a new analysis by Jed Kolko, chief economist for the real estate information site Trulia.com, among those taxpayers who itemize on their federal returns, 49 percent of total write-offs are housing-related — primarily mortgage interest and local property taxes. For homeowners as a group, this is a big deal.

But since only about one-third of all taxpayers itemize on their returns — the rest opt for the standard deductions — who’s really getting these tax savings? As you might guess, people who have higher incomes are more likely to itemize and claim mortgage interest and other housing deductions. Citing the latest data on the subject, published by the IRS in 2009, Kolko found that while just 15 percent of households with incomes below $50,000 took itemized deductions, 65 percent of those with incomes between $50,000 and $200,000 did. Just about everybody with income above $200,000 — 96 percent — itemized on their returns.

In an interview, Kolko said that a $25,000 cap on itemized deductions, as suggested by Mitt Romney in the second debate, would hit people in the $50,000-to-$200,000 income range, since their average total write-off (for mortgage interest, charitable contributions and all the rest) was $24,000. It would take a much bigger bite out of households with income beyond $200,000, of course, where the average total for all itemized deductions came to $81,000 in the IRS data from 2009. Romney’s plan envisions that the losses in deductions for all categories of taxpayers would be offset by the lower payments they’d be making based on a one-fifth reduction in marginal rates. President Obama supports a cutback in housing-related and other write-offs for people with incomes above $250,000, capping the marginal rate at which they can take their deductions at 28 percent.

Where do homeowners who claim the biggest mortgage interest deductions — and would be most vulnerable to caps and cutbacks — live? The Tax Foundation, a nonpartisan research group in Washington, did a study based on 2009 IRS data and found that there are dramatic differences state by state.

As a general matter, residents of states with high housing and tax costs, large average mortgage balances and high household incomes write off the most; states with low housing costs and incomes, the least. Any significant cutbacks on deductions would hit people in the high-cost states the hardest, absent compensating savings from elsewhere in any forthcoming tax code changes.

California ranked No. 1 in the size of home mortgage deductions, with $18,876 on average. Next came Hawaii ($16,730), the District ($16,720), Nevada ($15,502), Washington state ($14,262), Maryland ($14,162) and Virginia ($14,094). At the opposite end were homeowners in Oklahoma ($7,992), Iowa ($8,104), Nebraska ($8,233), Mississippi ($8,301) and Kentucky ($8,345). Maryland is tops in the percentage of taxpayers taking mortgage interest write-offs (37.5 percent), followed by Connecticut (34.7 percent), Colorado (33.7 percent) and Virginia (33.6 percent).

What’s the outlook on cutting back deductions? Two of the traditional political guardians of the housing tax benefits — the National Association of Realtors and the National Association of Home Builders — say they are digging in for battles next year, no matter who wins the presidential election.

“The real debate” on housing deductions, said Jamie Gregory, deputy chief lobbyist for the Realtors, is not on TV between Obama and Romney, but on Capitol Hill next year, where both groups are planning major defenses.

By: Kenneth R. Harney, Washington Post


3.8% Tax on Housing? Answers & Resources

Here are the 10 things you need to know about the 3.8% tax according to the National Association of Realtors(NAR):

1.) When you add up all of your income from every possible source, and that total is less than $200,000 ($250,000 on a joint tax return), you will NOT be subject to this tax.

2.) The 3.8% tax will NEVER be collected as a transfer tax on real estate of any type, so you’ll NEVER pay this tax at the time that you purchase a home or other investment property.

3.) You’ll NEVER pay this tax at settlement when you sell your home or investment property. Any capital gain you realize at settlement is just one component of that year’s gross income.

4.) If you sell your principal residence, you will still receive the full benefit of the $250,000 (single tax return)/$500,000 (married filing joint tax return) exclusion on the sale of that home. If your capital gain is greater than these amounts, then you will include any gain above these amounts as income on your Form 1040 tax return. Even then, if your total income (including this taxable portion of gain on your residence) is less than the $200,000/$250,000 amounts, you will NOT pay this tax. If your total income is more than these amounts, a formula will protect some portion of your investment.

5.) The tax applies to other types of investment income, not just real estate. If your income is more than the $200,000/$250,000 amount, then the tax formula will be applied to capital gains, interest income, dividend income and net rents (i.e., rents after expenses).

6.) The tax goes into effect in 2013. If you have investment income in 2013, you won’t pay the 3.8% tax until you file your 2013 Form 1040 tax return in 2014. The 3.8% tax for any later year will be paid in the following calendar year when the tax returns are filed.

7.) In any particular year, if you have NO income from capital gains, rents, interest or dividends, you’ll NEVER pay this tax, even if you have millions of dollars of other types of income.

8.) The formula that determines the amount of 3.8% tax due will ALWAYS protect $200,000 ($250,000 on a joint return) of your income from any burden of the 3.8% tax. For example, if you are single and have a total of $201,000 income, the 3.8% tax would NEVER be imposed on more than $1000.

9.) It’s true that investment income from rents on an investment property could be subject to the 3.8% tax. BUT: The only rental income that would be included in your gross income and therefore possibly subject to the tax is net rental income: gross rents minus expenses like depreciation, interest, property tax, maintenance and utilities.

10.) The tax was enacted along with the health care legislation in 2010. It was added to the package just hours before the final vote and without review. NAR strongly opposed the tax at the time, and remains hopeful that it will not go into effect. The tax will no doubt be debated during the upcoming tax reform debates in 2013.

By: The KCM Crew, KCM Blog