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The “Medicare Tax”

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.

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Bruce Perlman
Posted by
Bruce Perlman
October 25, 2010

Bruce Perlman

Bruce joined Cartus in 1991 and was named senior vice president and general counsel in 2001. He has lectured extensively and written many articles on tax and legal topics related to global relocation issues.

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