Q&A with Jordan Field
Lawyer says taxpayers should consider minimizing tax effect
Q: There's a lot of talk over the Internet about health care reform taxing home sales 3.8 percent next year, so now is the time to sell if you're considering. Is that true?
A: It depends. New Internal Revenue Code Section 1411 imposes an unearned income Medicare contribution tax (UIMCT) on net investment income of individuals, trusts and estates, but only to the extent that modified adjusted gross income (MAGI) exceeds the applicable threshold amount, which range from $125,000 to $250,000, depending on filing status. For taxpayers without foreign earned income, MAGI generally equals adjusted gross income (Line 38 of Form 1040).
Code section 121 allows exclusion of up to $500,000 of gain from selling a principal residence. Because the excluded gain is excluded from gross income, it is not included in MAGI or net investment income when calculating UIMCT. Gain in excess of the section 121 excludable amount is included in MAGI and net investment income. Thus, UIMCT only applies to gain from a principal residence exceeding the section 121 exclusion, and then only if MAGI exceeds the threshold amount.
Q: What are the exclusions?
A: Code section 121 generally allows exclusion of up to $500,000 of gain from the sale of property if it has been the taxpayer's principal residence for periods aggregating at least two years in the last five years. Numerous special rules and exceptions apply for purposes of section 121. Generally, if a taxpayer sells a principal residence due to change in place of employment, health or unforeseen circumstances, the exclusion may be available at a reduced amount despite failure to satisfy the duration requirements.
The period in which at least two years of occupancy must occur may be extended for up to 10 years for members of the military and intelligence communities. If a taxpayer has occupied the principal residence for at least one year in the five-year period, any periods in which the taxpayer is residing in a state-licensed care facility (e.g., a nursing home) count as occupancy.
Q: Does this touch only home sales, or include other investments such as stock?
A: Net investment income for UIMCT purposes includes interest, dividends, rents, royalties, annuities, gains from sale of most assets (e.g., stocks, bonds, vacation houses, cars, boats, etc.), income from passive activities and income from trading commodities or financial instruments.
Subject to last-minute action by Congress, taxpayers should consider strategies to minimize the effect of both UIMCT and the scheduled regular tax rate increases starting Jan. 1. Strategies which: (a) reduce MAGI below the threshold amount; (b) reduce excess MAGI to less than net investment income; or (c) reduce net investment income, will reduce UIMCT.
Options include taking gains before the end of 2012, deferring losses to 2013, installment sale planning, increasing portfolio allocations to tax-exempt bonds and nondividend paying stocks, maximizing contributions to qualified retirement plans and gifting assets that generate investment income to family members with lower MAGI (outright or through family-investment companies or other vehicles). Individuals should consult a tax professional regarding their specific situation.
There are numerous exceptions and special rules that may potentially be applicable to some taxpayers. Nothing herein is investment advice, and nontax considerations should be taken into account before buying any assets.
PAULA BURKES, BUSINESS WRITER