JIM FLYNN: Report on new tax causes unfounded angst

Much to the chagrin of encyclopedia salesmen, the Internet has become a boundless, mostly free, source of information about nearly everything. However, the Internet has also become the perfect vehicle for rumor mongering.

A recent example of this has to do with the new health care-reform act — the Patient Protection and Affordable Care Act of 2010. On March 28, Paul Guppy, vice-president of research at a Washington State research organization, wrote an article appearing in the Spokane Spokesman-Review. In his article Guppy stated there was now in place a 3.8 percent tax on home sales.

“Middle-income people must pay the full tax even if they are ‘rich’ only for a day — the day they sell their house and buy a new one,” he wrote.

Within hours, the article was flying around the Internet, with added commentary about how this sales tax would destroy lives.

Let me try to describe what the new law really does.

To begin, a new chapter — Chapter 2A: “Unearned Income Medicare Contribution” — has been added to the Internal Revenue Code. (In defense of Guppy’s inaccurate analysis, it’s important to note that Chapter 2A, like all the other chapters of the Internal Revenue Code, seems to be written with the specific intent that it should never actually be understood by anyone.) Chapter 2A does create a new 3.8 percent tax to support Medicare. The tax begins in 2013. It applies to “investment income”  and affects only individual taxpayers with an income in excess of $200,000 and couples filing a joint return with an income in excess of $250,000.

Now, putting this in the context of the sale of a home, for a married couple the first $500,000 of gain from the sale of a home is exempt. For an individual taxpayer, the exemption amount is $250,000. Once a taxpayer has used up the exemption, the gain from the sale becomes investment income and is subject to a regular capital gains tax of 15 percent. Under the new law, if a taxpayer exceeds the income threshold amount stated above, the 3.8 percent Medicare support tax will also apply.

To give a simple example of how this works: Let’s assume a married couple with an annual income of $350,000 bought their home in 2003 for $400,000 and, because the home is in, say, Aspen, they sell the home in 2013 for $1,000,000. Their investment income from this sale is $100,000 ($600,000 less the exemption amount of $500,000). They will pay $15,000 in regular capital gains tax on this sale, plus an additional $3,800 because of the new Medicare support tax.

To put this matter into proper perspective, since very few people these days sell their home with a gain that exceeds the exemption amount, and since only a small percentage of taxpayers have an income high enough to trigger the new tax, the number of home sales that will be affected by this tax is going to be small.

Here’s hoping Guppy does a better job on his next research project.
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Jim Flynn is a private attorney at Flynn Wright & Fredman LLC in Colorado Springs. Reach him at jtflynn@fwflegal.com.