The Supreme Court has upheld all of the provisions of the Patient Protection and Affordable Care Act of 2010 (the Health Care Law).  Unless Congress makes changes then individuals that make more than $200,000 a year ($250,000 if married) will start paying more into Medicare beginning in 2013.

The health care law changes the Medicare tax in two ways: It adds an additional Medicare tax (surtax) on wages and self-employment income above a certain level, and it creates a new Medicare contribution tax on investment income.

Some high-income households will only be subject to one of those changes, and some will be subject to both.

Starting next year, high-income individuals will pay another 0.9 percentage points on their earned income over $200,000 ($250,000 if married). That’s on top of the 1.45% they currently pay on all of their wages and the 2.9% they currently pay on their self-employment income.

High-income households will start paying a 3.8% tax on at least a portion of their net investment income, such as interest, dividends, capital gains, rents and other passive activity income.

The 3.8% Medicare tax on net investment income is computed on the lesser of (a) “net investment income” or (b) the excess of modified adjusted gross income over $250,000 in the case of married taxpayers filing a joint return ($200,000 for singles).

Net investment income does NOT include: (1) interest on tax-exempt bonds, (2) qualified retirement plan distributions, (3) income subject to the self-employment tax, or (4) trade or business income (such as income from an S Corporation in which you materially participate or are non-passive).

We would be happy to answer your questions about these new Medicare tax provisions and how they might affect you personally.  Please call or email your JMF accountant.