Discussion:New 3.8% Medicare surcharge on investment income

From TaxAlmanac, A Free Online Resource for Tax Professionals
Note: You are using this website at your own risk, subject to our Disclaimer and Website Use and Contribution Terms.

From TaxAlmanac

Jump to: navigation, search

Discussion Forum Index --> Tax Questions --> New 3.8% Medicare surcharge on investment income


Rywvupuli (talk|edits) said:

8 July 2012
So I am sure most are aware about the potential new 3.8% medicare surcharge on investment income which will begin in 2013 without any action by Congres to change this. My question is, does this surcharge relate "actively managed" rental properties? The definition of investment income in this case is as follows:

"For purposes of this tax investment income is defined to include taxable interest and dividends, long and short term capital gains, annuity income, passive rental income and royalties." I realize that technically rental income is all considered to be passive, but there are the provisions of "actively managing" a rental property which allow for up to a $25,000 loss against ordinary income for taxpayers with an AGI under $150,000.

To me the "active management" of a rental property (usually considered passive) is contradictory and perhaps one of those gray areas to be worked out with the passing of this surcharge. I was wondering if anyone had some advice on this topic and whether it is possible to take actively managed rental property outside the definition of investment income?

Thank you, Ryan

Trillium (talk|edits) said:

8 July 2012
See prior (brief) discussion of this issue here: Discussion:The 2013 Health care tax on passive income: rental real estate. That discussion also contains the actual definition of net investment income, which is not the same as what you have quoted above (and has specifics that might settle your questions).

You may also be interested in CCH's "impact" statement on this (see the bottom of the center column of page 5/15 of their June 29, 2012 CCH Tax Briefing, which is linked at the bottom of the Health Care Act of 2010 main page article).

Uncle Sam (talk|edits) said:

8 July 2012
I am angered when I hear of half-truths being publicized due to sheer ignorance of understanding the tax law.

I had a client call me a week ago - his doctor told him that he'd be paying 3.8% tax on the sale of his house. This client is a 75 year old single widower who's lived in that house over 10 years as a primary residence and doesn't intend on selling it.

Ever hear of the game "telephone"? A whispered secret starts out with a message - when it gets whispered from one person on the line to the next - by the time it reaches the end of the line - it's a completely different message.

In answer to the OP - the 3.8% tax is only imposed on investment income when the taxpayer's AGI (single) is over $ 200,000, or $ 250,000 (joint).

So far, I haven't heard one discussion yet on whether municipal bond interest gets included in that calculation of investment income, the way it does for the Social Security income calculation.

Trillium (talk|edits) said:

8 July 2012
Uncle Sam, footnote 285 of the JCT Technical Explanation, referring to Sec. 1411(c)(1)(A), states: "Gross income does not include items, such as interest on tax-exempt bonds, veterans’ benefits, and excluded gain from the sale of a principal residence, which are excluded from gross income under the income tax." [my bolding]

Death&Taxes (talk|edits) said:

8 July 2012
I had posted something on the Ministry of Dis-information when the law first passed. Trillium referred to it the other day.

Rywvupuli (talk|edits) said:

8 July 2012
I know the income limits, but was wondering if there was any gray area regarding the passive income of rentals which are actively managed for purposes of this surcharge. Thanks to Trillium's post I see the standard rules of all rental properties not owned by a real estate professional are passive for the surcharge as well. Thank you Trillium.

Harry Boscoe (talk|edits) said:

8 July 2012
"...all rental properties not owned by a real estate professional are passive...."

What's a motel where the owner turns down the sheets and puts a chocolate on the guest's bed?

Harry Boscoe (talk|edits) said:

8 July 2012
Oh, yeah, there's that seven day rule. So, what's a hotel where the guests stay two weeks, on average, *and* the owner - who works a forty-hour week as a pastry chef - puts chocolates on their pillows?

Harry Boscoe (talk|edits) said:

8 July 2012
I think the gray area is still very much alive and well.

WEISSEA (talk|edits) said:

8 July 2012
Want to avoid any SE taxed income as the .9% healtcare medciare adder (2.9+.9)=3.8% gets you. Believe S corp line 1 business income for material particiant owner avoids the investment income tax.

Harry Boscoe (talk|edits) said:

9 July 2012
When we wrap this "rental" activity in an S corporation, we just *prove* that the gray area comes in several forms and hides under several rocks.

Using an S corporation to run from the SE tax will put the taxpayer's bacon in the pan and cook it with the officer/shareholder distribution/compensation dilemma instead. From one gray area to another...

CrowJD (talk|edits) said:

9 July 2012
I agree with Uncle Sam. Isn't it terrible that so many of the people who are telling falsehoods about the law claim to be big Christians?

Harry Boscoe (talk|edits) said:

9 July 2012
The grade-school game of "telephone" is charming and childlike because the participants don't have **agendas**. With an agenda the charming and childlike game quickly becomes malicious. Oops, I forgot to include a tax issue here.

How about there were malicious misinterpretations of the new tax law that were intentionally disseminated to prey on people's fears. And many think it falls to the professional tax preparers to counter those misinterpretations. That's not included in my professional duties, how about you?

Tax Lady (talk|edits) said:

9 July 2012
Can the gain from the sale of a principal residence, push a taxpayer into going over the threshold amounts (MFJ $250,000 - SS MFS $125,000 and others $200,000) and therefore require them to pay the 3.8% tax on their investment income?

Dennis (talk|edits) said:

9 July 2012
No. However do note the effect on Estates and Trusts:

The surtax will be imposed on the lesser of (a) the undistributed net investment income of a trust or estate and (b) the amount by which adjusted gross income exceeds the top inflation-adjusted bracket for estate and trust income, For 2013, the threshold amount is expected to be approximately $12,000.

JAD (talk|edits) said:

9 July 2012
I believe that the gain on the sale of the home is taken into account in the calculation of net investment income to the extent that the gain exceeds the amount that is excluded. See footnote #285 in the JCT technical explanation, and thanks to Snowbird for pointing this out on another thread.

If the gain in excess of the excluded gain is included in net investment income, why wouldn't it also be included in the total that is compared to the threshold amount? When I get to that issue in the JCT report, I will post back, if we're still on that issue.

Trillium (talk|edits) said:

9 July 2012
Tax Lady & JAD, sure, the non-excludible part of the gain, and any other taxable gain, would be included in AGI and could push a taxpayer over the threshold, but of course only the amount in excess of the threshold (or the net investment income, if less) is subject to the tax. It doesn't make all investment income subject to the tax.

TaxLady, I will correct your abbreviation of "SS" to "MFS" for the $125k threshold, in your post three above this one, as I am guessing that was just a typo?

Tax Lady (talk|edits) said:

9 July 2012
Thank You Trillium.

What I meant was MFJ or Surviving Spouse, $250,000, MFS $125,000, and in any other case $200,000.

Sorry, in a little pain today. It was my 35th year wedding anniversary on July 7th. We went to Detroit (Greektown) for the weekend. Thought I was 20 years old and jacked up my lower back. LOL !!! Husband is a happy guy. :)

DavidG (talk|edits) said:

9 July 2012
Caller: "I heard at work there is a new tax when I sell my home."

Financial planner talk show host: "That is correct. There is a 3.8% tax on the gross sales price, it "comes off the top" like a real estate commission."

DavidG via email (abbreviated): "Urban legend; internet rumor; 200k/250k AGI threshold; 250k/500k sec 121 exclusion."

Financial planner talk show host: **no response**

Fsteincpa (talk|edits) said:

9 July 2012
WTG DavidG. lol. If a single guy makes a $300,000 gain on the sale of his house and that brings his income to $212,000, the the 3.8% is taxed on the $12,000. Basically the lesser of the taxable gain/investment income or the amount over the taxable threshold.

Snowbird (talk|edits) said:

9 July 2012
How do installment sales work under this tax? Page 137 "There are also rules for determining the price of an article on which excise tax is

imposed.(footnote 292) These rules provide for: (1) the inclusion of containers, packaging, and certain transportation charges in the price, (2) determining a constructive sales price if an article is sold for less than the fair market price, and (3) determining the tax due in the case of partial payments or installment sales.Footnote 292: Sec. 4216.

If someone owns property (farm land rented out) with basis of $100k and sells it for $600K ... could they avoid the tax by an installment sale?

Trillium (talk|edits) said:

9 July 2012
I haven't done a lot of reading on the excise taxes on certain medical device manufacturers (Sec. 4191), which is the part of the Technical Explanation you're referring to, so I wouldn't venture to address that.

But it seems that tech expl reference merely raised another question for you, relating to Sec. 1411 and how modified AGI is determined, and whether or not an installment sale would move some income to other years - i.e., would it be a way to hold total AGI down under the threshold.

Modified AGI is defined in Sec. 1411(d):

(d) MODIFIED ADJUSTED GROSS INCOME.—For purposes of this chapter, the term ‘modified adjusted gross income’ means adjusted gross income increased by the excess of—
(1) the amount excluded from gross income under section 911(a)(1), over
(2) the amount of any deductions (taken into account in computing adjusted gross income) or exclusions disallowed under section 911(d)(6) with respect to the amounts described in paragraph (1).

So if you've moved non-foreign income out of this year's AGI via some means, then you've helped keep this year's MAGI low for purposes of the Sec. 1411 thresholds.

If you're asking about the parsing of "property held in a trade or business" with regard to the rented-out farm land, then I refer you back to Harry's posts in the link provided for Ryan above (post 2).

Snowbird (talk|edits) said:

9 July 2012
Trillium, I screwed up ... I did not look at section title. I was thinking about 3.8% medicare tax and an investment where the gain was $500k ... could it be an installment. Farm rental not a good one because of landlord participation. Thanks!

Death&Taxes (talk|edits) said:

9 July 2012
But with an installment sale you are betting that the capital gain rate does not change.

Tax Lady (talk|edits) said:

14 August 2012
This post has been edited to remove information under copyright by CCH, in compliance with TA's copyright policies. If anyone has a non-gated link, please add the link, but in the meantime here is a recap of the general point being made:
The CCH Practical Tax Bulletin has a good recap of the conclusions above - see Example 3 in particular.

Compliments of CCH Practical Tax Bulletin.

To join in on this discussion, you must first log in.
Personal tools