Nov, 2011

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It's getting near that time again. Find out what's happened over the past year and what's on the horizon that may impact you! Taxes_&_aspirin small.jpgRemember right about this time two years ago when Congress was fighting about whether to extend the Bush tax rates? Well... it's déjà-vu all over again!

The principal issue that this article is going to address is the impending sunset of the Bush tax rates at the end of 2012, resulting in an increase in the Federal capital gain tax rate from its present 15% to the old 20%. In addition, the implementation of the 3.8% Medicare Contribution Tax ("MCT") contained in "Obamacare" will result in a effective 23.8% capital gain rate for many, if not most, transactions in 2013 and beyond.

The Medicare Contribution Tax of 3.8% comes into play when the taxpayer's Modified Adjusted Gross Income ("MAGI") exceeds threshold amounts. For the non-corporate taxpayer, MAGI includes capital gains from investment property and passive activities (rentals). The income thresholds are $250,000 for married taxpayers and $200,000 for others.  

Let's look at a couple of examples.

Example #1 - Single taxpayer has MAGI of $150,000, consisting of $100,000 gain from sale of a rental home and $50,000 ordinary income. No Medicare Contribution Tax charged because MAGI is less than $200,000.

Example #2 - Same circumstances as Ex. #1 except taxpayer has MAGI of $250,000. MCT would apply to $50,000 of the $100,000 gain (the $50,000 net investment income in excess of the MAGI).

Example #3 - Same circumstances as Ex. #1 except taxpayer has MAGI of $300,000. MCT would apply to the entire $100,000 gain.

Keep in mind, however, that Section 1031 exchanges are unaffected by these changes--an exchange will still defer all of the taxes that would otherwise be paid.