Lynn Brenner's Family Finance

Is There A New Tax on Selling a Home? Say It Ain't So!

Q: Is it true they’re going to impose a new 3.8% tax on the selling and buying of a home? This would mean a $15,000 tax on a house worth $400,000? Please say it’s just a rumor! –DL via email

 

A: It isn’t a rumor; but it’s not as draconian as you’ve described it, either.

You’re talking about the new 3.8% tax on unearned income, which goes into effect in 2013. Its proceeds are earmarked to shore up Medicare, which is seriously underfunded and is about to be hit by a tidal wave of new beneficiaries as the baby boomers turn 65.

But in the first place, this tax will be levied only on single people with adjusted gross income of more than $200,000, and on married couples filing jointly whose adjusted gross income is more than $250,000. (The 3.8% tax applies to whichever is the smaller amount – your unearned income, or the amount by which your modified adjusted gross income for the year exceeds the high-income threshold. For more information about how the tax works, read this article at CNNMoney.com).

If you earn less, you won’t be affected by it.

In the second place, the 3.8% tax applies only to unearned income that exceeds existing tax exemptions.

When you sell your primary residence – i.e., a house that you’ve owned and lived in for at least two of the previous five years – you get a generous tax exemption on your profit: If you’re single, you owe no taxes on the first $250,000; and if you’re a married couple filing jointly, the first $500,000 of your profit is tax-exempt.

Your profit is the sale price minus your original cost, which includes capital improvements and transaction fees. So let’s say you sell your house for $400,000, and after deducting the price you paid for it and the capital improvements you made, your profit on the sale is $300,000.

If you’re married, you would have no taxable profit: the entire $300,000 would be tax-free. If you’re single, your taxable profit would be only $50,000.

Let's assume you're single. A 3.8% tax on that $50,000 profit would be just $1,900.

Of course, that wouldn't be your only tax. You'd also owe a capital gains tax on the $50,000.

The capital gains tax is currently capped at 15%, but is likely to be raised to 20% in the future. If the capital gains rate rises to 20%, and you’re also subject to the 3.8% additional tax – probably a safe assumption in a year when your income is inflated by a $300,000 profit on the sale of a house – you’d owe 23.8% in taxes on your $50,000 taxable profit.

In other words, on total proceeds of $300,000, you'd owe $11,900 in taxes. All things considered, that's not a huge hit.

Please send your questions to [email protected]. I'm sorry I can't respond personally to every email. Questions are addressed only online.

(c) Lynn Brenner, All Rights Reserved.

How to Pick a Medicare Prescription Drug Plan

Medicare's prescription drug coverage, or Part D, divides the annual cost of your drugs between you and Medicare: In 2010, you pay the first $310. Then Medicare pays 75 percent of the cost between $310 to $2,830. Then you hit the "doughnut hole" - a gap in which Medicare pays nothing until your total out-of-pocket cost reaches $4,450. Then, Medicare pays 95 percent of your drug costs for the rest of the year.

    If you think that sounds complicated, brace yourself. Picking a Part D plan is anything but simple. If you opt for original fee-for-service Medicare for your hospital and physician coverage, you must select a stand-alone Part D plan. There are scores to choose from, and their cost can vary enormously depending on the drugs you take, the pharmacies you pick, and the plan's co-pay structure.

You can compare plans here.

The most important points to consider:

1. Does the plan cover the drugs you take? Many plans provide full coverage only for "preferred" drugs; some cover only generic drugs. Some plans require you to try other (less expensive) drugs before they'll cover a "non-preferred" drug.

2. How is your share of the cost determined? Some plans charge a flat co-payment for each prescription, but the amount may depend on whether you're buying a generic drug, a brand-name, or a "specialty" drug. Other plans have co-insurance requirements: You pay a percentage of the drug's cost; if the drug's price rises, so does your payment.

3. Where does the plan require you to buy your drugs? Some plans require you to use a mail-order pharmacy; some have arrangements with chain pharmacies; some let you use small, local pharmacies. The cost of drugs can vary dramatically, depending on your choice.

Here's how the Medicare Rights Center, a national consumer advocacy group, advises you to figure out which prescription drug plan will best meet your needs, whether you're comparing stand-alone Part D plans or the prescription drug coverage that is included in Medicare Advantage plans.

First:

• Make a list of the medicines you take, the dosages, and how much you currently pay.
• Make a list of pharmacies you use regularly.

Then decide what type of drug plan you need. If you have:

• Original Medicare: Choose a stand-alone prescription drug plan (PDP) if you want to continue to receive your other health benefits through Original Medicare.
• A Medicare Advantage plan (such as an HMO or PPO): Generally, you must get Part D drug coverage as part of your private health plan’s benefits package.

Third, use the Medicare Drug Plan Finder tool at www.medicare.gov or call 1-800-MEDICARE to review your options and get details.

Fourth, ask questions, such as:

• Does the plan cover all the medications I am taking?
• If the plan does not cover a medication I take, does it cover one that will work for me? (Ask your doctor.)
• Does the plan require that I get special permission before it will cover the medication I need (such as prior authorization or step therapy)?
• How much will I pay at the pharmacy (co-payments or coinsurance) for each drug I need? (Be aware that certain drugs may cost a lot even if they are covered.)
• How much will I pay in monthly premiums and annual deductible?
• Will I have to pay the full cost of my drugs at some point after the deductible (i.e., the 'doughnut hole' coverage gap)?

For a list that includes these and more questions to ask, go to Medicare Interactive. 

 

Please send your questions to [email protected].  I'm sorry I can't respond personally to every email. Questions are only addressed online.

(c) Lynn Brenner, All Rights Reserved

Questions to Ask Before Picking a Medicare Plan

Medicare open enrollment season runs from November 15 through December 31, conveniently overlapping Thanksgiving and Christmas: Whenever parents and their adult children need a break from holiday planning, shopping, cooking, and celebrating, they can join forces to decipher the intricacies of Medicare Parts A, B, C, and D!

If you're new to Medicare, you'll want to take time to learn the jargon and compare your choices carefully.

If you're already enrolled in a Medicare plan that you like, don't breathe your sigh of relief too fast. You too should review the available choices, says the Medicare Rights Center, a consumer advocacy group. The reason: many plans change their costs and benefits from year to year.

First, a quick overview for everyone who's just getting started:

There are two basic types of plan.

Original Medicare is the traditional fee-for-service plan. It includes Part A (hospital coverage) and Part B (doctors' visits and outpatient services). With original Medicare, you’re covered for 80% of Medicare’s approved fee, and you can go to any doctor who accepts Medicare. Your monthly premium for Part B depends on your income. (In most cases, there's no premium for Part A.)

The alternative is a Medicare Advantage plan, sometimes called Medicare Part C. Medicare Advantage plans are run by private insurers but subsidized by the government. With these plans, you must use a pre-selected network of medical providers. You pay a monthly premium in addition to your Part B premium.

Like Original Medicare, Medicare Advantage plans include Part A and Part B. But they usually also include benefits that aren't provided by Original Medicare. If you enroll in a Medicare Advantage plan, for example, your prescription drug coverage (Part D) is included in your benefits package.

By contrast, if you opt for Original Medicare, you must buy a stand-alone prescription drug policy.

If you enroll in Original Medicare, you may also want to consider buying a Medigap, or supplemental policy, to cover some of the Part A and Part B expenses that Original Medicare doesn't pay for. (Medigap policies cannot be used to pay for your out-of-pocket expenses in a Medicare Advantage plan.)

Medigap policies are sold by private insurers, and their cost varies depending on the policy and the insurer.

You’ll find a description of Original Medicare and Medicare Advantage, and a full list of all the Medicare Advantage plans available in your zip code at www.medicare.gov. 

There's only one Original Medicare plan, but there are literally hundreds of Medicare Advantage plans.

If you're considering Medicare Advantage, here are some of the questions the Medicare Rights Center advises you to ask:

ž        1. Will I be able to use my doctors? Are they in the plan’s network and are they taking new patients who have this plan?

ž        2. Which hospitals, home health agencies, and skilled nursing facility are in the plan's network?

         3. How much is my monthly premium?

ž        4. How much will it cost to see my primary care physician? How much will it cost to see a specialist?

ž        5. Do I need a referral to see a specialist?

ž        6. Are there higher co-pays for certain types of care, such as hospital stays or cancer treatment?

ž        7. Does the plan have an annual limit on out-of-pocket costs? Do all services count toward that out-of-pocket maximum?

ž         8. What part of the country does the plan cover?  (New York, New Jersey and Connecticut, for example.)

     9. What kind of coverage do I have if I travel outside of the service area? (Twice a year, for instance, I visit my daughter in Milwaukee. Am I covered if I get sick there?)

         10. Are my prescription drugs on the plan’s ‘formulary’ -- i.e., list of covered drugs?

         11. Does the plan require that I get “prior authorization” before my prescription will be covered? Does it impose other restrictions (like limiting the quantity, or requiring that I try a cheaper medication before it will cover a more expensive one)?

           12. How much will I have to pay out of pocket before my coverage starts? (In other words, what is the deductible)?

           13. How much will I pay for brand-name drugs? How much for generic drugs?

For a list that includes these and more questions to ask, go to Medicare Interactive.

In   I  What if you decide you prefer Original Medicare? Then you'll have to comparison-shop for a stand-alone prescription drug policy. And that'll be the subject of my next post.

 

Please send your questions to [email protected].  I'm sorry I can't respond personally to every email. Questions are only addressed online.

(c) Lynn Brenner, All Rights Reserved

 

 

 

 

ž