The Effect of the Affordable Care Act on Income Taxes

Web Admin - Tuesday, January 28, 2014

illinois obamacare tax lawyerThe Affordable Care Act (ACA or "ObamaCare") is a sweeping reform that touches many different areas of the law. One particular area that it impacts is the income tax structure. The law makes many small changes, such as increasing the threshold for deducting a medical expense to 10 percent of a person's adjusted gross income, or adding a new 0.9 percent tax to wages above $200,000. 

But, one particular change can have a large effect on income from real estate sales and trusts. The ACA adds a new 3.8 percent tax on a person's net investment income. But, this new tax only applies to certain people, and often, but not always, those in higher tax brackets.

The Effect on Real Estate Sales

The 3.8 percent tax applies to some sales of real estate, but not to all sales. First, the tax only applies to people making more than $200,000 a year or $250,000 for married couples filing jointly. Even for those people, not all sales qualify. This is because the first $250,000 of profit on the sale of the home does not count as income if the home is the person's primary residence.

And, that number goes up to $500,000 for married couples. A primary residence is a home that has acted as the sellers “main home” for two of the last five years. By way of example, suppose a married couple making over $250,000 a year sold their primary residence for a net profit of $650,000. They would only pay the 3.8 percent tax on the $150,000 in profits that exceed the $500,000 cap.

The Effect on Trusts

Even though the tax only applies to individuals making more than $200,000, it can also affect trusts with more than approximately $12,000 in net investment income, regardless of the beneficiary's income. This means that the tax can affect people earning less than $200,000 if they have an interest in such a trust. In this instance, the 3.8 percent tax applies to all net investment income in excess of the $12,000 cap. However, the law contains many exemptions and exceptions. For instance, certain types of trusts that do not qualify as trusts for purposes of income tax also fall outside of this law.

If you have questions about how the ACA affects your taxes or think you may be subject to the new net investment income tax, contact an Arlington Heights tax attorney today. Call 847-934-6000 to speak to a member of our team. We serve many Northwest Suburban areas including Rolling Meadows, Des Plaines, Crystal Lake, and other nearby communities.

About the Author: Attorney Jay Andrew is founding partner of Drost, Gilbert, Andrew & Apicella, LLC. He is a graduate of the University of Dayton School of Law and has been practicing in estate planning, probate, trust administration, real estate law, residential/commercial leasing, contracts, and civil litigation. Since 2005, Jay has been a Chair of the Mock Trial Committee for the Annual Northwest Suburban Bar Association High School Mock Trial Invitation which serves over 240 local Illinois students each year.

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