Paying for Health Care Reform

Posted by Autumn Ronda

Starting in 2013, taxpayers at higher income levels will feel the pinch of two new tax hikes included in the Health Care bill that passed in March. The first is a .9% increase in the Medicare tax on wages over $200,000 ($250,000 in the case of a couple). Generally, every wage earner owes a 2.9% Medicare tax, which is split between the employee and the employer. Under the new tax, the additional .9%, which brings the total Medicare tax for these high earners to 3.8%, is payable entirely by the employee.

The second tax contained in the bill is a Medicare tax on investment income at a 3.8% flat rate for taxpayers with a modified adjusted gross income of $200,000 (or $250,000 for couples). Investment income is a broad category including, but not limited to, most interest, rents, dividends, royalties, capital gains from the sale of a stocks and bonds, and passive rental and business income. Even any taxable gain on the sale of a home is hit by this new tax. The tax on investment income not only affects individual taxpayers, but also can have a significant effect on the income taxes owed by trusts and estates.


Congress’s effort to raise revenue to pay for the costly healthcare bill has made two very significant changes to the tax system. Historically, the tax on wages to pay for Medicare has been a flat tax and have only been imposed on earned income. The new .9% tax on wages will impose a progressive Medicare on the previously flat tax, and the new 3.8% tax will impose a Medicare tax on investment income which previously did not exist.

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