CPA & Business Advisory Blog

Health Care Reform & Additional Medicare Tax

The Patient Protection Act, as amended by the House Reconciliation Act, broadens the Medicare tax base for higher income taxpayers by:

1. Imposing an additional of 0.9 percent on earned income in excess of $200,000 for individuals and $250,000 for families; and

2. Imposing an unearned income Medicare contribution of 3.8 percent on investment income for individuals with AGI above $200,000 and joint fi lers with AGI above $250,000.

Impact

The 3.8 percent Medicare “contribution” would be effective starting in 2013. This additional Medicare tax would apply only to the employee portion of the tax. When added to the 0.9 percent tax also imposed by the Patient Protection Act on these high-income earners’ portion of their Hospital Insurance (HI) payroll tax, $210 billion is estimated to be raised over the 2013 to 2019 period.

Impact

Neither the $200,000 nor $250,000 amounts are indexed for inflation.

Net investment income includes interest, dividends, royalties, rents, gain from disposing of property, and income earned from a trade or business that is a passive activity. Self-employed individuals, as well as estates and trusts, would also be liable for the additional tax.

Distributions from qualified retirement plans, including pensions and certain retirement accounts, would be exempt from paying the additional tax. For example, income from individual retirement accounts (IRAs), 401(a) money purchase plans, 403(b) and 457(b) plans would be exempt.

Comment

The final version of the additional Medicare payroll tax appears to be a compromise between the House’s proposed income tax surtax on higher-income individuals and the Senate’s original “Cadillac plan” excise tax.

Impact

The additional Medicare tax on qualified higher income taxpayers would not start until 2013. Issues over how certain deferred compensation arrangements would be taxed are certain to arise.

Source: CCH, a Wolters Kluwer business

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