The
impending fiscal cliff
has garnered a lot of attention, and rightfully so. With
taxpayers at all income levels facing the potential for much
higher taxes if the expiration of lower tax rates under current
law is allowed to happen, the loss of disposable income to higher
income taxes could destroy the fragile economic recovery.
But among all the reasonable concerns that policymakers have
raised about the fiscal cliff, one particular issue seems
patently ridiculous: how the
Medicare surtax
applies to sales of residential property. Although some have made
it sound as though the surtax represents an unprecedented federal
property tax, the sad fact is that very few people will be
fortunate enough ever to have to pay it.
As part of the Affordable Care Act, a new surtax is scheduled
to take effect at the beginning of 2013. Single taxpayers with
salaries or self-employment income of $200,000 will potentially
face two different additional taxes; the corresponding income
limit for joint filers is $250,000. First, for all earned income
over the respective limit, you'll have to pay an extra 0.9% of
the amount over the limit in additional Medicare taxes. That
takes the current combined employer and employee contribution for
Medicare taxes up from 2.9% to 3.8% for that high-income
portion.
The second tax, though, could have much bigger implications.
For all investment income, which includes interest, dividends,
capital gains, and some additional income categories,
a 3.8% surtax
will apply to the extent that your gross income exceeds the
respective limits. So if you were above the limit excluding your
investment income,
all
of that investment income will be subject to the additional
tax.
Combined with the increases to high-income tax brackets, which
the president has proposed to leave standing despite plans to
restore tax cuts for lower- and middle-income tax brackets,
taxpayers earning more than those limits stand to face
substantial tax hikes.
Reasonable people can disagree about whether those tax hikes
are wise at this point. What's silly, though, is focusing on
homeowners as potential victims of the surtax.
To be clear, it's definitely possible that some homeowners
will end up having to pay the surtax. To the extent that
homeowners have a gain that they're required to recognize under
the tax code, it will constitute investment income under the
surtax rules. It will therefore be subject to the 3.8% surtax to
the extent that it pushes homeowners over the respective income
limits.
But consider the confluence of factors that has to take place
in order for the surtax to apply:
- The homeowner needs to have an actual gain on the property,
which is less likely now than at nearly any point in the past.
Given how much real estate
Bank of America
(
BAC
) ,
Citigroup
(
C
) ,
Wells Fargo
(
WFC
) , and their banking peers have had to foreclose upon recently
due to
underwater mortgages
, it's clear that plenty of homeowners are sitting on massive
losses.
- The amount of the gain has to exceed the special exclusions
for capital gains on principal residences. Single taxpayers get
up to $250,000 tax-
free
, while joint filers enjoy a $500,000 exclusion. Those amounts
don't just benefit from low long-term capital gains rates;
taxpayers pay absolutely
no
tax on them.
- Either taxpayers need to already have substantial income
outside of the property sale, or the sale has to generate so
much gain that it triggers the surtax income limits.
Admittedly, vacation homes don't get the benefit of an
exclusion on capital gains. But unfavorable tax treatment is
nothing new for those fortunate enough to own two homes.
Whenever any tax provision gets proposed that has even a
glancing impact on housing, concerns arise that the housing
market's fragile recovery will fade away. As the story goes,
homebuilders (
TOL
) and (
SPF
) will suffer from an exodus of buyers who don't want to pay
extra taxes on their eventual gains.
But this time, that story is out of touch with the times.
Despite the uproar, very few homeowners need to fear what will
come down the road when they sell the homes they live in.
Like it or not, Bank of America still makes money on
mortgages, and it's done a reasonable job working through the
underwater loans on its books. But it still has further to go.
Find out how the bank is doing in the Fool's premium report on
Bank of America. With a year's worth of updates included free,
you've got no excuse not to click here and get started today.
Tune in every Monday and Wednesday for Dan's columns on
retirement, investing, and personal finance. You can follow him
on Twitter
@DanCaplinger
.
Fool contributor Dan Caplinger won't need to worry about big
gains on his home anytime soon. He owns warrants on Wells Fargo.
The Motley Fool owns shares of Bank of America, Wells Fargo, and
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