Understanding the Medicare Tax Law

With the deadline for filing taxes for 2011 less than a month away, we thought it would be helpful to pass along some information regarding the new Medicare Tax Law.

Below are some frequently asked questions taken from a document recently published by the NAR. The complete document may be accessed here.

Q: What is the Medicare Tax?
A: As part of the Healthcare law, a new 3.8% tax will apply to the “unearned” income of “High Income” taxpayers. Another 0.9% tax will apply to the “earned” income of many of these same individuals. Both levies are referred to as “Medicare” taxes.


Q: Who does the tax apply to?
A: The tax is NOT imposed on the total AGI, nor is it imposed solely on the investment income. Rather, the taxable amount will depend on the operation of a formula. The taxpayer will determine the LESSER of (1) net investment income OR (2) the excess of AGI over the $200,000/$250,000 AGI thresholds. Thus, if net investment income is the smaller amount, then the 3.8% tax is applied only to the net investment income amount. If the excess over the thresholds is the smaller amount, then the 3.8% tax would apply only to the excess amount.


Q: When will this new Medicare Tax go into effect?
A: The new Medicare tax on unearned income will take effect January 1, 2013.


Q: Is it a real estate Transfer Tax as many are calling it?
A: It is not a transfer tax, and in fact will only apply to some taxpayers and only if they fall under the new guidelines by several measures. No one should assume incorrectly that it will apply across the board.


Q: How is it calculated?
A: The method is not simple and requires more than just casual thought. The new 3.8% Medicare tax is assessed only when Adjusted Gross Income (AGI) is more than $200,000/$250,000.  AGI includes net income from interest, dividends, rents and capital gains, as well as earned compensation and several additional forms of income presented on a Form 1040 Income Tax Return.


Q: Will this affect any portion of the filers Mortgage Interest Deduction?
A: No. The mortgage interest deduction is unchanged. No cap was imposed on any itemized deductions.


Q: Is this tax calculated at the closing table?
A: No this is an issue that will be addressed by the sellers/ tax filers upon their subsequent filing of their Federal Tax Returns.


Coldwell Banker Caine accepts no liability for the accuracy of the content of this blog post. All information was obtained from the National Association of Realtors website. Be sure to contact your tax advisor for more information on the Medicare Tax law and any other tax issues.