If it is in writing it must be true, right? If it is written on the internet then it must be true, right, and thus must be spread to inform everyone that you know. I am a skeptic by nature. Accordingly, I take the exact opposite presumption; that just because it is written on the internet does not necessarily mean that it is false.

A few weeks ago an acquaintance sent me the following email which was purportedly authored by a man who was a “Certified Residential Appraiser”:

“And this my friends is ANOTHER good reason to downsize NOW! WILL YOU SELL YOUR HOUSE AFTER 2012?

THIS IS TRUE

Will you ever sell your house after 2012? Call you Democratic Senator’s Office to confirm this hidden fact about the ObamaCare regulation.

Will you ever sell your house after 2012? Did you know that if you sell your house after 2012 you will pay a 3.8% sales tax on it? That’s $3,800 on a $100,000 home, etc. When did this happen? It’s in the health care bill. Just thought you should know. SALES TAX GOES INTO EFFECT 2013 (Part of HC Bill). Why 2013? Could it be to come to light AFTER the 2012 elections?

REAL ESTATE SALES TAX

So, this is “change you can believe in”? Under the new health care bill all real estate transactions will be subject to a 3.8% Sales Tax. The bulk of these new taxes don’t kick in until 2013. If you sell your $400,000 home, there will be a $15,200 tax. This bill is set to screw the retiring generation who often downsize their homes. Does this stuff make your November and 2012 vote more important?

Oh, you weren’t aware this was in the ObamaCare bill? Guess what, you aren’t alone. There are more than a few members of congress that aren’t aware of it either https://www.gop.gov/blog/10/04/08/obamacare‐flatlines‐obamacare‐taxes‐ home

I hope you forward this to every single person in your address book. VOTERS NEED TO KNOW”

 

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I see many emails that may or may not be true. Few are not important enough to me to care either way. Since this was income tax related, and a pretty splashy statement, I decided to look into it. Of course, I hesitated for a moment after seeing the words “THIS IS TRUE.” (thinking that, well, if they say it is true, let alone in all capital letters, it must really, really be true) but pressed on with my research anyway.

What I found was that the statement was not true. In fact, nearly everything stated in the email was completely false. Like many hoaxes, there is a small grain of truth. Here is what the new law really says and how it really works.

The new law does impose a 3.8% tax on net investment income for high income taxpayers if both 1 and 2 below apply:

  1. The new law only applies to married taxpayer’s who have Adjusted Gross Income (AGI) of over $250,000 ($200,000 AGI for single people).
  2. The new law only applies to the extent that the married taxpayers have a profit from the sale of their principal residence that exceeds $500,000 ($250,000 for single people).

Here are a few additional things that you must know:

  1. Adjusted Gross Income: AGI is your gross income minus losses from investments, deductions for IRA contributions, etc.)
  2. Net Profit From Sale: If you paid $400,000 for your house and, over the years, put $50,000 of improvements into the house and had $40,000 of Closing Costs (i.e. real estate commission, legal fees, title charges, etc.), your “Basis” for determining a gain or loss is $490,000. If you then sold your house for $1 million, your gain would be $510,000 ($1 million – $490,000 = $510,000). However, for married couples, the first $500,000 of your gain is not taxed in any way ($250,000 for single people). Accordingly, if you were lucky enough for this to be your situation, your taxable gain would be $10,000, and this has been the law since 1997.

The author of the email would have you believe that if you sold your house for $1 million, that the new law imposed an additional tax of $38,000. This is not true.

Here are some examples that illustrate how the new tax actually works:

Example 1: Using the example above for the married people who sold their house for $1 million after 2012, if their AGI was over $250,000 there would be an additional tax of $380 (3.8% x $10,000 = $380). So, there actually will be an extra 3.8% tax for some people but even for them, it is not on the entire sale price of the house.

Example 2: Using the example above for the people who sold their house for $1 million, if their AGI was not over $250,000 there would be a $10,000 taxable gain (this has been the law since 1997) but no extra 3.8% tax.

Example 3: If you and your spouse sold your house for a profit of less than $500,000 then there is no tax of any kind even if your AGI was $100 million.

Example 4: If you and your spouse sold your house for a profit of $10 million and your AGI is under $250,000 then there is a taxable gain (this has been the law since 1997) but no extra 3.8% tax.

In another situation, the Shelby American Automobile Club emailed a New York Times Headline to its members warning them of a new 10% federal tax on the sale of classic cars being pushed by New York Senator Charles Schumer. This purported new tax was going to provide so much revenue that the IRS was opening a special division just to hunt down sellers of classic cars.

The fake article stated “Collecting classic cars is in the province of the haves — not the have-nots,” and quoted Mr. Schumer as saying. “Those who own these cars can afford a hefty tax on that ownership.”

There was not even a grain of truth in this article since it was intended to be a preposterous spoof. However, many of the car club members believed it to be true and began forwarding the email to their friends and family, calling their representatives and organizing against the purported new tax. Those Club members were apparently unable to discern that this article was an intended spoof despite the fact that:

  1. The fake New York Times headline was emailed to them on April 1, 2011 (i.e. April Fool’s Day); and
  2. Several other bizarre articles appeared next to the tax article including one that proclaimed that a new study showed that the incidence of colon cancer was significantly lower for people who took up recreational polka dancing (speculated to be the result of a heavy diet of kielbasa and stuffed cabbage).

 

Conclusion:

The issue is not whether it is good or bad to have extra taxes. The issue is one of truth versus non-truth and whether to believe what you read, just because it is written.

In the first example, regarding the 3.8% tax on home sales, there was a grain of truth. In the second example, the fake tax article was intended to be interpreted as being so preposterous that no one could believe it to be true. However, that did not stop some people from jumping to a conclusion, albeit a wrong conclusion.

So, if it is in writing must it be true? Should you republish emails as being true if you have not verified them to be true? Few people like getting spam type emails no matter how important you might believe them to be. They like it even less if they discover that what you are sending them as being true is actually false or fake.

 

 

07/2011

Copyright ©, Keith B. Baker – 2011

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