Tax The Ambitious at 3.8%
In a country where talk of obesity and rising health care costs seem to flood every news channel on a constant basis, our all knowing, all powerful government, in its infinite wisdom, is punishing the ambitious, hard-working entrepreneur in order to extend Medicare benefits and to cover the cost of the impending national health care program. Actually, only half the cost as they have forecast.
The idea is this. If you as an individual show a gross adjusted income of more than $200,000 ($250,000 for married couples), then the government will require you to pay a 3.8% tax on the capital gains above and beyond those limits.
The National Association of Realtors lobbied heavily against this legislation as it cropped up at the last minute to solve the obvious question: “Who’s going to pay for it?”
Well, if you’re “rich” as the government defines, then YOU are going to pay for it. The more you make, the more you pay, which perpetuates the continual problem of a vast majority of the nation NOT paying taxes.
I used to equate Robin Hood’s “stealing from the rich, giving to the poor” to the government taxing hard working Americans and giving it to the lazy people. Now, I think of it more like this. Robin Hood steals the money BACK from the government who stole it from the people and gives it BACK to the rightful owners. Go go gadget archer.
A quasi-confusing document was released by the NAR which offers a few examples of how this new legislation will actually affect the home owner. While some have blown the tax out of proportion, not knowing the actual details of the law, assuming that everyone who owns a home is going to be taxed, that is simply not true. It’s just those of us who make “enough” money doing it.
Example 1: Suppose your adjusted gross income (AGI) for the year hits the $150,000 mark, and you sell some of your stocks and bonds for a net gain of an additional $150,000. That puts your new AGI at $300,000, or $100,000 above the $200,000 limit. $100K * 3.8% = $3,800.00
Your Tax Liability: $3,800.00
Example 2: You and your wife have a combined income of $190,000. You sell some stocks and bonds which net a capital gain of $60,000. In addition to that, you sell your residence which you purchased for $600,000 for $1.2Million for a gain of $600,000. Since you gained over $500,000 on the home, everything over $500,000 is added to your AGI and becomes taxable. So, $190,000 + $60,000 + $100,000 = $350,000. Again, you’re over by $100,000.
Your Tax Liability: $3,800.00
Example 3: This one blew me away. I’ll add this one as it’s written in the NAR brochure with no modifications.
In 2010, Ethan inherited a four-plex investment property from his great aunt. She had used it for many years as an investment rental property in San Francisco. At the time of her death, the adjusted cost basis of the property was $10,000. During her period of ownership, she had taken $240,000 worth of depreciation deductions on it. Its fair market value was $900,000 when she died. Because there was no estate tax for 2010 and because the carryover basis was in effect, Ethan’s basis in the inherited property is also $10,000. The prior depreciation allowances carry over to him, as well. He continues to use the property as an investment rental property.
Ethan later sells the property for $1.2 Million. He is single, and reports Schedule C self-employment income of $180,000.
Ouch. That hurts. That’s additional tax that Ethan is required to pay because of the health care program. What if we assumed that Ethan lived a rather responsible life, since he obviously knows how to make money ($180,000/year before any inheritance). We could assume he’s healthy, eats well, exercises, doesn’t smoke, isn’t an addict of sorts, etc. I think you may be able to figure out where this argument could lead.
When does this legislation go into effect?
January 1st, 2013.
I’m curious to know what you think about this plan, and what the effect of the cause will be. How creative are those of us who make an income that the government deems “too much” going to be?
Leave your comments below.