Obamacare Tax Increases For 2013
By Steve Barlotta, CPA
In my last blog I mentioned that a few weeks ago the U.S. Supreme Court ruled to uphold most of the components of the Patient Protection and Affordable Care Act of 2010; President Obama’s comprehensive health care reform package. Included in the legislation are two distinctly different Medicare surtaxes that increase taxes for upper-income filers starting in 2013.
The first one is a .9% Medicare surtax on earned incomes. It applies to joint taxpayers with wages above $250,000, and single filers with wages over $200,000. The employer pays nothing extra and it is the responsibility of the individual taxpayer to pay this surtax on their 2013 returns. This tax also applies to self-employed individuals with incomes in excess of the above thresholds.
The second surtax, which is a 3.8% Medicare payroll tax, is not as straightforward. Before 2013, the Medicare payroll tax applied only to wages. The legislation expands it to include most kinds of investment income. In the act, investment income includes interest, dividends, capital gains on the sales of investments like stocks, bonds, second homes and rental properties. Also included are taxable portions of annuity payments, royalties, and passive income from real estate and investments. The 3.8% tax only applies to joint taxpayers with modified adjusted gross income (MAGI) above $250,000 and single filers with MAGI over $200,000. But, the tax is imposed on the smaller of net investment income or the amount by which MAGI exceeds $250,000 for joint filers and $200,000 for single filers.
Example Of 3.8% Medicare Tax
Let’s assume a couple is filing a joint tax return and in 2013 their investment income is $40,000 and their MAGI is $400,000. In addition to their regular income taxes, they would have to pay a surtax of $1,520. That would be 3.8% on the $40,000 investment income which is smaller than $150,000, the amount by which the couple’s MAGI exceeds the $250,000 threshold.
Example Of Both Medicare Taxes
Let’s assume the same facts as above, but the couple had earned income of $350,000 in 2013. As explained above, the Medicare tax on investment income would be $1,520. The .9% Medicare tax on earned income would be $900. That would be .9% on $100,000, the amount by which the couple’s earned income exceeds the $250,000 threshold. In this example, the couple’s total tax increase from the Medicare surtaxes would be $2,420 ($1,520 plus $900).
Once again lawmakers have added more complications to an already confusing tax code. If the Bush-era tax cuts are allowed to expire at the end of 2012, it will create an even bigger tax bill for upper-income filers along with more disorder among taxpayers.
