Question: When should a relocation manager be concerned about the recently enacted Health Bill?
Answer: When it contains a provision that taxes real estate. However, much of the media coverage on this part of the bill is likely to be wrong.
The recent health bill contains a provision that is titled the “Medicare Tax.” It is scheduled to take effect in 2013 and will apply a 3.8% tax on the unearned income of so-called “high income” taxpayers.
This tax has caused a media stir because it has been incorrectly described by many as a “national sales tax on real estate.” This is a gross overstatement, but it does require a careful examination to understand the relatively minimal impact we can expect from this tax.
In a nutshell, here’s what the law says:
Starting in 2013, a Medicare Tax of 3.8% will be imposed on any net investment income—that is, non-earned income, such as the profit made on the sale of a house—that is greater than the amount by which an individual’s Adjusted Gross Income exceeds a specific income threshold ($200,000 for an individual; $250,000 for a married couple filing jointly).
So: an unmarried home seller whose salary is $210,000 and who also has $60,000 in profits on his home sale (after all credits have been applied) will be required to pay a 3.8% tax on the $60,000. However, the $60,000 is reduced to $10,000, which is the amount by which his salary exceeded the $200,000 limit; in other words, he will be required to pay $380 (3.8% of $10,000) to satisfy this particular tax requirement.
As you can see, the tax applies only to unearned income on high earners, and only on the amount above the $200,000/$250,000 earned income limits described above.
Some media reports have called this a 3.8% “sales tax” on real estate, but if that description was accurate, our unmarried home seller’s tax bill would be $38,000—clearly not the case.
For a relocation manager, there are probably two key takeaways here. First, during the year of a relocation, a transferee’s earnings may be temporarily increased because many of the relocation benefits are considered taxable. So, an employee with a salary below $200,000 could find this tax applicable when the relocation benefits are added on top of their normal salary amount. Second, depending on your company’s gross-up methodology, you and your relocation provider need to be prepared to walk employees through the above example, so they understand that they do not need to insist on being grossed-up on a $38,000 tax bill.
The Medicare Tax may be a little complicated to figure, but it’s likely to affect relatively few relocating employees and will result in only a modest additional tax burden when it does apply. This is a topic that relocation managers should anticipate, but it should not keep anyone up at night.
Editors’ note: Be sure to join us on December 15 at 2 p.m. ET when Bruce presents an eLearning on Tax and Legal issues. Please feel free to email email@example.com for more details or if you’re interested in attending!