Medicare Tax on Investment Income

In case you missed it, the new health care bill has fundamentally changed the nature of the Medicare tax and might lead to similar changes in the Social Security tax.

Presently, employers and employees pay a Medicare tax of 1.45% each on wages of up to $106,800. Self employed taxpayers pay both the employee and employer portion which represents a 2.9% tax on earnings up to $106,800. This amount is indexed for inflation and tends to increase each year.

The new health care bill will impose a Medicare tax on investment income above a certain level, as well as on earned income. Single individuals who earn more than $200,000 and couples over $250,000 would be subject to the higher rate. In addition, the employee tax rate for the Medicare tax would increase from 1.45% to 2.35%. The employer rate would remain at 1.45% of any covered wages. An employee would pay 2.35% of covered wages and would separately pay 2.35% of unearned income.

If the $200k/$250k thresh-hold is reached, the tax would apply to unearned income in excess of the thresh-hold amount.

The Medicare tax would apply to unearned income from interest, dividends, annuities, royalties, rents and capital gains. Apparently, income from retirement plans and Roth IRAs would not be treated as investment income. Most likely, investment income would include the portion of an annuity payment that is not a return of the initial investment in the contract.

The change in the Medicare tax would not take effect until Jan. 1, 2013.

We can only wonder if or when the Social Security tax will also be imposed on investment income and if it will only be imposed on taxpayers with an income of more than $200k/$250k. We also wonder how long it will take for the thresh-hold limit to be reduced to something like $100,000 a year or even $50,000 per year. It's extremely hard to believe the claims that the health care bill will somehow reduce the cost of health care even while it is costing at least $900 billion over the next ten years. If this bill results in more deficits than projected, there will be pressure to find more sources of tax revenue.

If inflation returns and pushes average incomes up, more and more people will be subjected to the assorted new taxes on those who make more than $200,000 (single) or $250,000 (joint) each year.

For more see http://money.cnn.com/2010/03/10/news/economy/medicare_tax.fortune/

and http://www.msnbc.msn.com/id/35844649/ns/health-health_care/

Vern