Section 1402 of the Healthcare and Reconciliation Act of 2010 which amends the Patient Protection and Affordable Care Act provides for a new unearned income Medicare tax of 3.8% and goes into effect January 1, 2013. This new 3.8% Medicare tax is codified at 26 United States Code Sec. 1411.
Taxpayers with Adjusted Gross Income (AGI) over $200,000 filing individually or $250,000 for married couples filing jointly could be subject to the tax if the taxpayer has unearned income. The tax is a 3.8% Medicare tax on “unearned” taxable income of interest, dividends, annuities, royalties and rents which are not derived in the ordinary course of trade or business, excluding S corporation or partnership income. If, for example, capital gains on a primary home sale exceed $250,000 for individuals or $500,000 for a married couple, and the income threshold is met, the excess realized gain is subject to the 3.8% Medicare tax.
There are special rules for estates and trusts.
The new Medicare tax is not imposed on the total adjusted income nor is it imposed solely on the investment income. Rather, the taxable amount depends on the results of a formula. The taxpayer will determine the lesser of (1) net investment income, or (2) the excess AGI over the $200,000/$250,000 AGI threshold. If net investment income is the lesser amount, then the 3.8% tax is applied only to the net investment income amount. If the excess over the threshold is the smaller amount, then the 3.8% tax would apply only to the excess amount.
A good and more detailed discussion of the new 3.8% Medicare tax is by the Congressional Healthcare Caucus. The tax is complicated, and if you think it may or will apply, you should seek professional tax advice from a certified public accountant.