Calculating the New Medicare Tax

The healthcare reform law passed earlier this year includes a little-discussed tax on some forms of real estate transactions.

The tax, which supports Medicare, potentially affects couples with adjusted gross incomes greater than $250,000 a year and singles with incomes above $200,000. Existing home sale tax breaks remain in place.

The tax is levied on the gain figured on the lesser of the sale of the house or the amount by which the sellers’ income exceeds the appropriate threshold.

Here’s an example offered in the Washington Post:

· Profit on home sale: $600,000
· Sellers’ income: $300,000
· Deductible amount under current law for a married couple: $500,000
· Capital gains tax due on $100,000: $15,000

Because the hypothetical sellers’ income is over the threshold, they’ll have to pay the new Medicare tax as well, which would be calculated in one of the following ways:

· Taxable profit: $100,000
· Difference between annual income and taxable profit: $200,000
· Difference between $300,000 income and $250,000 threshold: $50,000

The sellers would pay 3.8 percent on the lower number, which is $50,000. Thus, they owe IRS $1,900.

Source: Washington Post, Benny L. Kass (07/17/2010)