White House's Newest Health Care Reform Proposal Expands Medicare Tax for Wealthiest Individuals
The Facts
The White House’s recent health care plan includes a proposal that would increase the Medicare tax on wealthy individuals. Under the current system, all employees, regardless of how much they earn, pay 1.45 percent into the Medicare system every paycheck. Employers chip in an additional 1.45 percent, to bring the total Medicare tax to 2.9 percent per employee. The tax is strictly a payroll tax and does not affect “unearned income” from investments.
The president’s proposal introduces a progressive element into the tax: individuals earning more than $200,000 and couples earning more than $250,000 will pay an additional 0.9 percent surcharge in each paycheck, bringing their total payroll Medicare tax to 2.35 percent.
Perhaps more importantly, the White House has proposed changing the Medicare funding system from a purely payroll tax to an income tax, by expanding it to cover unearned income. Individuals earning in excess of $200,000 and couples earning more than $250,000 will be taxed at a 2.9 percent rate on unearned income from interest, dividends, annuities, royalties, and rents and capital gains. The changes, if approved by Congress, would take effect in 2013.
What’s at Stake
The Medicare tax on businesses will remain at 1.45 percent, regardless of the employee’s salary. High-earning employees, however, will face a 0.9 percent increase to their Medicare tax. Furthermore, wealthy individuals who receive at least some of their wealth through unearned income will now have to pay a 2.9 percent tax on that income (equivalent to the amount paid jointly by the employer and employee through the payroll system).
Steps to Consider
Individuals will want to monitor the White House’s proposal, particularly as to whether unearned income will be taxed at the 2.9 percent rate. Individuals may want to adjust their investment strategies to minimize the impact of the tax.
