Although a very rich man, King Solomon valued wisdom and learning more than silver and gold. As his writings in the Book of Proverbs reveal, the King saw little virtue in simply amassing wealth without a measure of prudence and wisdom. “What doth it avail a fool to have riches, seeing he cannot buy wisdom?” he asks in Proverbs 17:16.
Since many new and amended tax laws in the New Year’s fiscal deal are aimed at the wealthy, and particularly relatively wealthy investors, Solomon’s comments on the need for prudence in wealth are especially timely. The little known Medicare Tax is among a number of tax changes for 2013 that affect the way wealthy Americans manage their money.
The so-called Medicare Tax of 3.8% will affect many rental property investors in 2013 and beyond. This tax, billed as an investment surtax, applies not just to real estate, but also to a wide range of investments including dividends, capital gains and interest from sources such as bonds.
The Medicare Tax gets is name from the fact that it was originally passed as part of the Affordable Healthcare Act back in 2010, although it’s levied on investment income that has nothing to do with healthcare. And, as it’s currently written, this tax will hit primarily independent investors who maintain investment properties as a side project, not those who work full time managing their real estate portfolio. It also bypasses real estate companies or investment groups.
Because the Medicare Tax is levied on investments, it applies to whatever kind of investment property an individual owns, whether it’s a single family home, a multiplex or even a small business location, The key provision is that the investment be “passive” – or not considered an active business the inventor engages in full-time. With that in mind, financial experts expect the hardest-hit to be professionals such as doctors or lawyers who maintain a few investment properties alongside their regular incomes.
Even at that, though, the Medicare Tax affects only a subset of those independent rental property investors –those whose net income exceeds $200,000 if single and @250,000 for a married couple. The tax is applied either to an investor’s net investment income, or the amount by which the adjusted gross income exceeds that income threshold, whichever amount is less.
The Medicare Tax, like other tax penalties aimed at higher-earning Americans, is here to stay. Investors following Jason Hartman’s strategist for creating passive income from properties may want to heed Solomon’s advice about prudent management of wealth by taking a closer look at the provisions of the Medicare Tax and their own investing situations.
The Solomon Success Team