Congress is funding its latest entitlements with a 5.4% surtax on incomes above $500,000 for individuals and above $1 million for joint filers. The surcharge is intended to snag the greatest number of taxpayers to raise some $460.5 billion, and so the House has written it to apply to modified adjusted gross income. That means it includes both capital gains and dividends.
That surtax takes effect on January 1, 2011, or the day the Bush tax rates of 2001 and 2003 expire. Today’s capital gains tax rate of 15% would bounce back to 20% because of the Bush repeal and then to 25.4% with the surtax. That’s a 69% increase, overnight. The last time investors were hit with anything comparable was 1986, when the capital gains rate jumped to 28% from 20%, a 40% increase, as part of the Reagan tax reform that lowered income tax rates.
What this means for investors who are on the fence about selling real estate is plain and simple. Sell in 2010 and pay a 15% federal tax on your gains, or sell after January 1, 2011 and you could be looking at almost 26%.
The math goes like this: The current 15% fed cap gains tax sunsets this year and will likely go back to at least the 20% rate under Clinton. Add on the 5.4% health care surcharge and then you are at almost 26%!