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Old 07.11.2012, 13:11
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New US tax, 3.8% medicare tax on capital gain

This morning CNBC news was talking about new taxes in 2013. They detailed
a 3.8 percent Medicare tax:

The Patient Protection and Affordable Care Act (health care law) added a 3.8 percent Medicare tax beginning in 2013. The tax applies to net investment income or the excess of a taxpayer’s AGI above certain thresholds ($200,000 for individuals and $250,000 for joint filers), whichever is less. However, for estates and trusts, the threshold level is only $11,650 of net investment income before the 3.8 percent
tax applies.
For purposes of this 3.8 percent tax, “net investment income" includes interest, dividends, royalties, rents, capital gains, and passive income from trade or business activities


Does anyone know if this will be applied to US citizens abroad with capital gains from a home sale?

thanks in advance.
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Old 07.11.2012, 13:35
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Re: New US tax, 3.8% medicare tax on capital gain

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Does anyone know if this will be applied to US citizens abroad with capital gains from a home sale?
This is not new... just newly enforced and brought into the public eye.

My guess is, if the sale is in the US or posted to an account in the states, then (again, my guess) yes.

However, for sales outside of the US:
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In their present formulations, both bills specifically exclude overseas Americans from proposed mandatory US health insurance coverage. Language in the initial Senate health plan that would have imposed an excise tax on Americans residing abroad has been removed, and a specific exclusion has been added. The House health care package excluded overseas Americans from its inception.
Source
JC
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Old 07.11.2012, 13:53
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Re: New US tax, 3.8% medicare tax on capital gain

I found this article written in October 2012, and it states this tax does apply to US citizens abroad:

http://blogs.angloinfo.com/us-tax/20...cans-overseas/


This article says that for a home, there is an exclusion amount, which is good. For sale of second or vacation home, those abroad with investment income, or for those looking to give up US citizenship in 2013, they will be hit with this surcharge.

I enclose this article as additional information only as I was unaware of this medicare surtax before this morning.

Last edited by SWISSMISS143; 07.11.2012 at 13:54. Reason: typo
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Old 07.11.2012, 14:08
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Re: New US tax, 3.8% medicare tax on capital gain

Both sources are blogs. Neither come directly from the horse's mouth. Also, speculation is cheap.

If I were you and the other Americans (luckily this does not apply to me) wait till the IRS or the governing body of this new tax posts the rules in black and white. Then deal with it accordingly.
JC
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Old 07.11.2012, 14:17
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Re: New US tax, 3.8% medicare tax on capital gain

I was under the impression that the tax does indeed apply to overseas filers - it's the penalty for not having a US health care plan that does not apply to us.

(Oh, and don't forget that the capital gains on the sale of overseas property is calcualted in US dollars. So if you bought when the dollar was high against the CHF and sold at recent lows your US dollar adjusted capital gains can easily go over the exclusion - even if your gains were only on paper.)
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Old 07.11.2012, 14:46
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Re: New US tax, 3.8% medicare tax on capital gain

I looked on the IRS site and there does not seem to be guidance yet. I have been looking up information and this will become law in 2013 unless it is repealed by Congress. There is a lot of information now being posted by tax accountants to assist people doing end of year planning. They have to advise clients on this as law because they can not count on it being repealed.
In it's current state, this law applies to all US citizens, even those abroad who can not make use of Medicare. It also says this surtax has to be taken into account when calculating estimated tax owed.
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Old 07.11.2012, 14:50
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Re: New US tax, 3.8% medicare tax on capital gain

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In it's current state, this law applies to all US citizens, even those abroad who can not make use of Medicare. It also says this surtax has to be taken into account when calculating estimated tax owed.
Ouch!

So, instead of the lump sum Excise Tax is being applied, now in a different form where some will pay less, others more... Ouch!

JC
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Old 07.11.2012, 15:13
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Re: New US tax, 3.8% medicare tax on capital gain

The way I read it, if its your main residence and you've lived in the house for 24 of the last 60 months at least and are married then the first $500,000 is not taxable capital gains ($250,000 for single) after that your Adjusted gross income would have to be over $250,000 or $200,000 for an individual for this tax to apply to any non earned income (what capital gains is).

The adjusted gross income does exclude the FEIE so for me you need to make a capital gain (on a house you lived in) of over $500,000 and have income of over $200k $250k living in America or $300k $350k living overseas and under those circumstances this tax may sting you.

If its a pure investment property then it looks to me like it will hit if you earn over $300 individual or $350k married.

It is a tax, no one wants to pay tax, but it is only under certain circumstances of large capital gains for people with large incomes.
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Old 07.11.2012, 15:24
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Re: New US tax, 3.8% medicare tax on capital gain

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...Does anyone know if this will be applied to US citizens abroad with capital gains from a home sale?...
This may help: Important Exclusions from Capital Gains Tax

Quote from the article:
"There are several very important exclusions from capital gains tax that are worth reviewing. An individual can exclude up to $250,000, and married couples filing jointly $500,000, of any capital gains realized on the sale of a home or what is known as real property. This exclusion applies if the property is used as the primary residence for at least two out of the prior five years.

In addition, if an individual realizes both a capital gain and a capital loss in the same tax year, then the loss can be used to cancel out a gain. This is one of the reasons many taxpayers sell investments that have lost value at year's end. The capital loss will help to offset capital gains on other investments."

Are you thinking you're going to have more than 250K in capital gains on selling your house? If so, where do you own property cuz I want in that market!
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Old 07.11.2012, 15:33
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Re: New US tax, 3.8% medicare tax on capital gain

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Are you thinking you're going to have more than 250K in capital gains on selling your house? If so, where do you own property cuz I want in that market!
Easy, buy a house for CHF 500k in 2001 ($280k) and sell it in 2011 for CHF 500k ($625k). For the Swiss, you have broken even, for the US, you have made $345k!

Tom
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Old 07.11.2012, 15:33
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Re: New US tax, 3.8% medicare tax on capital gain

In a related question, since you will be taxed by Switzerland for any gains on sale of your primary residence, with a base rate of 40%, how does this tax impact US taxes? I would assume that this foreign tax paid would be able to offset any capital gains tax owen in the US if you did have a gain in excess of the 250/500k limits? Is this the case, and is there any way that these taxes paid could also offset US taxes owed on other capital gains or ordinary income?
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Old 07.11.2012, 17:48
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Re: New US tax, 3.8% medicare tax on capital gain

The answer to the capital gain information is the "paper gain" I have because I have owned the property a long time and the rate changed with the $-CHF.
So I have to pay tax on a paper gain, and a surtax on that as well.



Another element to this surtax is that my and my husband pensions are not considered qualified, so they are not excluded.
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Old 07.11.2012, 18:01
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Re: New US tax, 3.8% medicare tax on capital gain

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In a related question, since you will be taxed by Switzerland for any gains on sale of your primary residence, with a base rate of 40%, how does this tax impact US taxes? I would assume that this foreign tax paid would be able to offset any capital gains tax owen in the US if you did have a gain in excess of the 250/500k limits? Is this the case, and is there any way that these taxes paid could also offset US taxes owed on other capital gains or ordinary income?
First, the CH Grundstückgewinsteuer isn't necessarily 40%. The rates vary (widely) by canton, and decrease with every year of ownership. The initial rates are quite high to discourage speculation in the property market. Check with your canton for 'Besitzdauerzuschlag' or 'Besitzdauerreduktion'.

For instance, here in SZ, the tax is based on progressive rates from 8-30% for the first 40,000, and 30% for all capital gains over that. Additionally, if you own the home for less than one year, there is a 40% 'penalty' added. That penalty decreases to 30% in the second year, 20% in the third, 10% in the fourth.

If you hold on to the property longer than that, there is a reduction in the base tax, increading with each year. In the fifth year of ownership the reduction is 10%, the percentage of deduction increasing 3% for every further year of ownership until a maximum reduction of 70% after 25 years of ownership.

YMMV by canton.

But - I have absolutely no idea if the CH Grundstückgewinsteuer can be deducted from the US capital gains tax... Something in the back of my mind says no... I'll ask our tax guy and get back to you with an answer.
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Old 07.11.2012, 18:27
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Re: New US tax, 3.8% medicare tax on capital gain

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...wait till the IRS or the governing body of this new tax posts the rules in black and white.
The rules have been posted since around March of 2010, when PL 111-152 was passed. It amended the Internal Revenue Code to add 26USC1411; the text is here. There is a helpful explanation online here.

The text does not list exemptions for non-resident citizens.

Last edited by nikovteim; 07.11.2012 at 18:31. Reason: typos
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Old 07.11.2012, 19:28
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Re: New US tax, 3.8% medicare tax on capital gain

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In a related question...how does this tax impact US taxes?
See IRS Publication 54 (US Citizens Living Abroad) and Publication 514 (Foreign Tax Credit), and the instructions to Form 1116. They list the foreign taxes that are eligible (or not) for a tax credit. Taxes on income (whether salary or cap gains) are eligible, but you need to read through the details (a wonderful cure for insomnia).
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