It is not too early to begin planning for new taxes scheduled to appear in 2013. This alert focuses on two new taxes Congress enacted to pay for part of the cost of the 2010 healthcare reform legislation, the Affordable Care Act. Assuming the Supreme Court does not reject the healthcare law in its entirety, a new 0.9 percent hospital insurance (“HI”) tax will apply to earned income and another new 3.8 percent unearned income Medicare contribution (“UIMC”) tax will apply to investment income.
Additional HI Tax on Earned Income
The additional 0.9 percent HI tax will apply to wages1 and net earnings from self-employment2 in excess of a threshold amount: $250,000 for married couples filing a joint return, $125,000 for married couples filing separately, and $200,000 for those who are not married.3 The threshold amounts for the additional HI tax are not adjusted for inflation. Therefore, it is likely that more people will become subject to this tax in the future.
The additional tax on wages will be collected primarily by employers through payroll withholding, while any shortfall will be assessed on the income tax return. Unlike the regular 1.45 percent HI tax, there is no employer match.
The withholding obligation applies only to wages in excess of $200,000; however, the tax may apply to wages below that amount.4 Unlike the regular HI tax, which is applied separately to wages earned by each spouse, the new HI tax is imposed on combined wages for married couples filing a joint return. As a result, two working spouses, each earning $150,000 will have no additional withholding taken out by their employers; but they will still be liable for the additional HI tax to the extent their joint earnings exceeds $250,000. Because the threshold for married couples is less than twice the threshold for unmarried earners, the potential for a “marriage penalty” exists.
New UIMC Tax on Net Investment Income
The 3.8 percent UIMC tax will be imposed on the lesser of:
- net investment income; or
- the excess of modified adjusted gross income (“MAGI”) over a threshold amount.5
The threshold amounts are the same as those used for the new HI tax.6 For UIMC tax purposes, these thresholds are also not indexed for inflation.
The UIMC tax applies to the full amount of net investment income only if MAGI exceeds the threshold amount by at least the amount of net investment income. The additional HI tax on earned income and the UIMC tax on investment income can both apply in the same year.
MAGI is defined as adjusted gross income, increased by foreign earned income or housing costs excluded from income,7 and reduced by deductions attributable to the excluded income.