An Aspect of Health Reform Bill You May Not Have Noticed: Medicare Payroll Tax Extended to Investments

July 14, 2010

The long and complicated Health Reform bill is only now under close examination revealing some of the "fine print" which may impact your taxable income. Under current law, the Medicare payroll tax only applies to wages. However, unless Congress acts, beginning in 2013 a Medicare tax will, for the first time, be applied to investment income. In addition, without Congress intervention or IRS modifications, the new tax would also apply to sales of residences.

A new 3.8% tax will be imposed on net investment income of single taxpayers with AGI above $200,000 and joint filers over $250,000. Net investment income includes interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than property held in a trade or business).

The new tax won't apply to income in tax-deferred retirement accounts such as 401(k) plans. Also, the new tax will apply only to income in excess of the $200,000/$250,000 thresholds. So if a couple earns $200,000 in wages and $100,000 in capital gains, $50,000 will be subject to the new tax.

There is hope that there will be changes before the new regulations take effect in 2013. We will keep you posted on developments.

For more information, please contact your Perelson Weiner partner.

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