Tax Truths

This past week I was at a lunch where a real estate professional was bemoaning the “house tax” associated with the Affordable Care Act.  When I suggested that the health care legislation didn’t include a house-tax I was met with much skepticism.  I explained there was a capital gains tax change that could involve houses, but that didn’t get much traction.  Finally someone used their iPhone to visit an Internet site that confirmed that the tax increase relates to capital gains.  While it’s possible to pay capital gains tax on the sale of your primary residence – it’s unusual. (Right now it’s unusual for a house to sell for more than it cost in the first place!)  In an effort to expand my outreach on this subject, I thought it would be helpful to go into more detail here.

Part of the health-care overhaul legislation includes a new 3.8% Medicare tax on “unearned” net investment income.  (This piece was actually added in the second bill, called the Health Care and Reconciliation Act of 2010.)  It will impact taxpayers with incomes greater than $200,000 (or $250,000 for people who are married).  This is a 3.8% tax on income from sources that are not from the ordinary course of trade or business.  There’s a long list of examples in the legislation (Section 1402 if you want to read it for yourself) but basically we’re talking about investment income here.   While I don’t expect to do many tax returns with a house that gets this tax, it is likely to create more taxes for people with investment income.  Call it a stock-tax or mutual-fund-tax and I’ll be nodding in agreement.

This is where the home issue comes up.  When you sell your primary residence, most people do not pay a capital gains tax on the sale. The reason is there is an exclusion  for the first $250,000 (for married people it’s $500,000) of profit on the sale.  That means if you sell a half million dollar home for $700,000 you don’t pay any taxes on the difference – even though you got $200,000 more than you paid for it.  Now let’s say you sell this same house for more than a million dollars.  You would have to pay capital gains tax on the amount of profit that exceeded your threshold for the exclusion.    You would pay the Medicare surcharge tax (the additional 3.8%) on the profit that was more than the exclusion amount, if the combination of that and your income adds up to more than $200,000 ($250,000 married).  OK I get that it’s confusing.  Clearly I should really reconsider my complaints about congress and taxes.  Without such convoluted provisions, being an accountant could get boring. 

Health Care Reform Gets Going

A bunch of new measures associated with what I think of as the health care reform law, but is actually officially the Patient Protection and Affordable Care Act took effect this week.  While it’s worth following from simply the perspective of a consumer of health care and health insurance, it’s also interesting to watch the unexpected (at least to me) consequences unfold. 

The LA Times was where I first saw an article about insurance companies eliminating new insurance plans issued for children only because they don’t want to cover pre-existing conditions in these types of policies.  It sounded really dramatic, but apparently it’s not as draconian as it sounds.  The article says kids on family plans and children insured through a parent’s employer are not included in this ban.  Experts cited in the piece estimate it will impact about 500,000 children nationwide. The US Census bureau puts the number of children under 19 in the US at north of 78MM.  So this change would impact a little more than a half a percent of US kids. 

 It’s not clear to me who would purchase a child-only.   I guess it’s an option for parents who can’t afford or can’t get insurance for themselves, but want their kids to have it.  The insurance company spokespeople in the article indicated the worry is parents will only purchase these policies when their kids get sick now that the pre-existing conditions are eliminated.  As a former insurance company spokesperson myself I can identify with that concern.  Interestingly, my son has such a policy (with his pre-existing conditions excluded) that the insurance company insisted was my only option for coverage for him rather than family coverage.  Less than 1-percent of kids nationwide are impacted by this and my son is one of them.  Rats.  Well, I guess I’ll learn more about this particular topic first hand.

 In the meantime, I found this graphic on the implementation of the new law that I think is worth sharing. For something this complicated I'm not too proud to admit I appreciate a visual aid. (In the interest of full disclosure:  Using graphics as a means to understanding complexity is a pre-existing condition for me.)