What is the 3.8% ObamaCare Real Estate Tax?

Understanding the new ObamaCare taxes and how they apply to you. After watching tonight's episode of The O'Reilly Factor, Bill failed to explain the new ObamaCare 3.8% tax. The new tax is definitely Doo Doo Economics, so lets scoop up this pile of information.

From http://www.mcarthurlaw.com:

The 3.8% Tax is not withheld from a taxpayer’s paycheck, and it is not based on wages.  It is a tax on investment income.   It must be taken into account for estimated tax purposes; it will be treated as a tax for purposes of computing the penalty for underpayment of the estimated tax.  The 3.8% Tax is not deductible for income tax purposes. It is not indexed to inflation, so, like the alternative minimum tax, it will affect more people over time.

For individuals (i.e., U.S. citizens and resident aliens), the 3.8% Tax is equal to 3.8% of the lesser of:
i. “Net investment income” or
ii. The excess of “modified adjusted gross income” over a “threshold amount”

“Net investment income” is the excess of gross investment income over investment deductions.  It includes interest, dividends, capital gains, annuities, rents and royalties, except that any such income derived in the ordinary course of a trade or business is not included.  Net investment income also includes income from a passive activity, or a trade or business of trading in financial instruments or
commodities.  Thus, gains from trading in financial instruments or commodities are included, and hedge fund investments are included.  Net investment income also includes the taxable gain on the sale of a personal residence in excess of the amount allowed under the Internal Revenue Code as an exclusion.  In determining net investment income, no distinction is made between qualified and ordinary dividends, or between short-term and long-term capital gain.

As noted above, net investment income does not include interest, dividends, capital gains, annuities, rents or royalties derived in the ordinary course of a trade or business.  Net investment income also does not include income from an active trade or business, distributions from IRAs or other qualified retirement plans, distributions from qualified annuity plans, tax-exempt interest, veterans’ benefits,
and any income subject to self-employment tax.

With respect to trade or business income from partnerships, LLCs and Subchapter S corporations,the income attributed to a taxpayer will be excluded from his net investment income only if the taxpayer materially participates in the activities of the trade or business.  Where a taxpayer does not actively participate in the trade or business,  the gain or loss attributable to the disposition of  a
partnership or LLC interest or of stock in a Subchapter S corporation will be net investment income only to the extent of the net gain or loss that would be recognized if all of the entity’s property were sold for fair market value immediately before the disposition.

“Modified adjusted gross income” (“MAGI”) is the taxpayer’s adjusted gross income plus, for U.S. citizens or residents living abroad, the net foreign income exclusion amount.

The “threshold amount” is:
i. For married taxpayers filing jointly - $250,000
ii. For married taxpayers filing separately - $125,000
iii. For all other individual taxpayers - $200,000

To reiterate, the 3.8% Tax applies to the lesser of (i) net investment income and (ii) the excess of MAGI over the threshold amount.  Below are some examples illustrating this calculation:

Example 1: Single Taxpayer has salary income of $250,000 and no other income.  The 3.8% Tax does not apply because Taxpayer’s net investment income of $0.00 is less than $50,000, which is the excess of his MAGI over the threshold amount.

Example 2: Single Taxpayer has salary income of $50,000 and net investment income of $60,000. The 3.8% Tax does not apply because Taxpayer’s MAGI of $110,000 does not exceed the threshold amount (so that the “excess” MAGI of $0.00 is less than the net investment income of $60,000).

Example 3: Single Taxpayer has net investment income of $250,000 and no other income.  The 3.8% Tax applies to $50,000 of income (the excess of his MAGI over the threshold amount).

Example 4: Married Taxpayers (filing jointly) have $700,000 of salary income and $25,000 of net investment income.  The 3.8% Tax applies to the $25,000 of net investment income (which is less than the excess of the MAGI over the threshold amount).

Example 5: Married Taxpayers (filing jointly) have $200,000 of salary income and $300,000  of net investment income.  The 3.8% Tax applies to $250,000 (the excess of Taxpayers’ MAGI over the threshold amount).

Also, remember that this tax is in addition to the regular Federal income tax and to the alternative minimum tax.  In 2013, the Federal income tax will have a maximum rate of 39.6% for ordinary items of income, including dividends, and 20% for long-term capital gains.    The combined maximum Federal rate of taxation could be as high as 43.4%.