Health Care Reform – Additional Taxes On High Income Earners

Health Care Reform is here. The law enacted last year is comprised of two acts, The Patient Protection and Affordable Care Act, which was signed into law on March 23, 2010 and the Health Care and Education Reconciliation Act, which was enacted on March 30, 2010. Both acts are commonly referred together as “Health Care Reform” and cover a broad spectrum of health care issues amongst others. The law is lengthy, complicated and includes a variety of measures, which may not necessarily be limited to health care. Additionally, in order to pay for this global reform, the government needs to assess additional fees and taxes on corporations, insurance companies, health care providers, employers and individuals. The taxes on certain “high income” individuals will become effective in 2013.
Additional Hospital Insurance Tax

The Medicare Hospital Insurance Tax (Medicare Tax) is scheduled to increase in January 2013 for certain high income earners. Currently, both employers and employees are subject to a 1.45% tax each on wages paid to an employee. The employee’s portion is withheld each pay period and paid with the employer match by the employer to the IRS. Starting January 2013, an additional 0.9% will be assessed on the amount earned in excess of the following thresholds:

Married Filing Jointly $250,000
Single Filers $200,000
Married Filing Separately $125,000
This additional assessment also applies to self-employed workers.

New Tax on Investment Income

Also beginning in 2013, there will be a new 3.8% tax (Investment Tax) assessed on investment income earned by individuals whose income from wages and investments exceed the above thresholds. Investment income includes interest (except municipal bond interest), dividends, rents, royalties, capital gains on sales of investment instruments and bonds, taxable portion of insurance annuity payouts (unless from a company pension plan), passive income from rents and businesses the taxpayer does not actively participate in and taxable gain on the sale of a home over the $500,000 exclusion ($250,000 for single filers).

When applying the additional Medicare Tax and the new Investment Tax to a hypothetical married couple filing jointly who earns $400,000 of income ($200,000 from wages and $200,000 from investments) in 2013, we see that although that couple would not owe any additional Medicare Tax, because their wages are within the threshold, they would owe an additional income tax [$400,000 AGI – $250,000 threshold = $150,000 x 3.8%]. If another married couple filing jointly earned $500,000 of income in 2013 ($300,000 from wages and $200,000 from investments), they would owe an additional $9,950.00 in taxes. [$300,000 – $250,000 = $50,000 x 0.9% = $450 for the Medicare Tax and $500,000 – $250,000 = $250,000 x 3.8% = $9,500.00 for the Investment Tax].

If the additional Medicare Tax is not withheld by an employer, an employee is liable to pay it with the 1040 filing. Both the additional Medicare Tax and the Investment Tax should also be taken into account when determining whether or not an employee should pay estimated taxes, to avoid penalties and interest.

Jill F. Rosenfeld is an Associate Attorney at WJ&L who practices in the Business, Corporate and Commercial area, as well as in Tax, Trusts and Estates.

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