The Patient Protection and Affordable Care Act was signed into law on March 23 by President Obama. This massive health care reform package will raise nearly $400 billion through new taxes on employers and high-income individuals. The primary revenue raiser will be an increase in Medicare taxes.
 
Beginning in 2013, an additional Medicare Hospital Insurance tax of 0.9 percent will be imposed on earned income in excess of $200,000 for single filers and $250,000 for joint filers. Earned income includes both self-employment income and wages. The employer portion of the Medicare tax, currently 1.45 percent, will not change. The table below shows how the new Medicare tax will impact high-income earners. The threshold amounts are not indexed for inflation.

 

The Patient Protection Act, as amended by the House Reconciliation Act, will also impose an unearned income Medicare contribution of 3.8 percent on net investment income for individuals with Adjusted Gross Income above $200,000 for single filers and $250,000 for joint filers. Investment income includes interest, dividends, capital gains, annuities, royalties, rents, and income derived from passive activities. Distributions from qualified retirement plans will be exempt. The unearned income Medicare contribution will be effective starting in 2013. The 3.8 percent Medicare contribution and the additional 0.9 percent Medicare tax on earned income are applied independently. 
 

For professional help please contact your Berntson Porter tax professional at info@bpcpa.com or 425.454.7990.