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I am Realtor in La Jolla at Sothebys International Realty and I have a client who is trying to make sense out of the tax implications of the 3.8 % tax that will be added to certain investment income. My question is twofold: 1. will this tax be imposed on all real estate transactions and if so, which ones and 2. what will the adjusted gross income (AGI single or married) need to be in order for the tax to apply? and how is that AGI calculated?

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Tax Professional Answers

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Hope Shoulders, Esq.
In general, if the investment income is from passive activity, then the 3.8% net investment income tax will apply. Internal Revenue Code sec. 1411, states that a net investment income tax is imposed at a rate of 3.8 percent to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts. Most non-resident aliens and certain trusts are excluded from this provision. Investment income, includes but is not limited to: dividends, interest, royalties, capital gains, rental income, and non-business passive activity income, etc.

The statutory modified adjusted income (MAGI) amounts are: Married filing Joint - $250,000; Married filing Single - $125,000; Single - $200,000; Head of Household - $200,000; and Widower with dependent child - $250,000.

Calculating an individuals' MAGI is very complicated and a tax professional should be consulted. I offer the following calculation for two reasons one, because you requested the information and two, to stress the complexity involved in its calculation.

In general, the modified adjusted income is calculated as the individual's adjusted gross income (AGI) increased by the excess of (1) the amount excluded from gross income under section 911(a)(1) over (2) the amount of any deductions (taken into account in computing AGI) or exclusions disallowed under section 911(d)(6) with respect to amounts excluded from gross income under section 911(a). Section 911(a) refers to foreign earned income and housing cost amounts.

Many other issues may come into play when calculating MAGI, and I would stress seeking the advice of a tax professional to assist you in tax planning for your client.
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