If you are considering selling a business or cash flow investment property in the next few years you need to know about changes in tax law that could have an effect on your bottom line.
A new tax will go into effect January 1, 2013, for individuals earning $200,000+ annually, or $250,000+ for couples.
The health care reform package (the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010) imposes a new 3.8 percent Medicare contribution tax on the investment income of higher-income individuals. The tax will apply to the lesser of net investment income or modified adjusted gross income above $200,000 for individuals and $250,000 for joint filers and surviving spouses, and $125,000 for married couples filing separate returns.
If the gain from a sale of a business or investment added to your income exceeds these thresholds, you will pay an additional 3.8% tax on that income.
Although the tax will not take effect until 2013, it is important for individuals who will be affected by the tax to start examining ways to lessen the impact now. Net investment income includes interest, dividends annuities, royalties, rents, and other gross income attributable to passive activities. Gain from the sale of property not used in an active business (for example, your personal residence) and income from the investment of working capital are also treated as investment income. The tax won’t apply, however, to nontaxable income such as tax exempt interest, or to veterans’ benefits. An individual’s capital gains income will be subject to the tax. This includes gain from the sale of a principal residence, unless the gain is excluded from income.
A significant exception to the 3.8 percent Medicare tax applies for distributions from qualified plans, 401(k) plans, tax-sheltered annuities, individual retirement accounts (IRAs), and eligible 457 plans. These will not be subject to the tax.
If you wish to avoid this additional tax, you have to close by Dec. 31, 2012. Be sure to consult your tax advisor. For more cash flow investment information, visit www.PaperSourceOnline.com