Concerned about the 3.8% Tax? Here’s the 411

Many people have just found out about the 3.8% “add-on” tax to help fund Medicare. It was added at the 11th hour and comes up periodically in the debates and in the Press. There is a lot of misconceptions about whether this is a transfer tax, whether it hits all segments of the market equally, and how it all plays out.

Here’s how the tax works. For individuals earning $200,000 a year or more and married couples earning $250,000 a year or more, certain investment income above these income levels might be subject to the 3.8 percent tax on a portion of that income. I say “might” because whether the tax applies or not depends on many factors having to do with the kind and amount of the investment income the household receives.

Investment income includes capital gains, dividends, interest payments, and, for those who own rental property, net rental income.

Importantly, the $250,000 (for individuals) and $500,000 (for married couples) capital gain exclusion on the sale of a principal residence remains in place. So, if you’re a married household that sold a house for a $500,000 gain (that’s gain, not sale proceeds), that amount remains excluded from your income calculation.

If you’d like to learn more, the National Association of REALTORS’ tax Guru, Linda Gould, explains in detail, and there is a free publication you can request from NAR at the following location: