ACA News & Publications

Understanding the 3.8% Tax

November 30, 2012

You might expect the kind of information in this Pathways document to be communicated to you by your tax advisor, but as your valued advisor we wanted to be certain that you were made aware of the existence of the new 3.8% tax on particular investment incomes, as well as the 0.9% increase on Medicare tax imposed on high income individuals and households.

The 3.8% tax, passed by Congress in 2010, is to officially go into effect beginning January 1, 2013. The tax will generate an estimated $210 billion over 10 years with the purpose of funding Obamacare and the depleted Medicare budget. The new tax is being called a “Medicare tax” because the proceeds are to be dedicated to the Medicare Trust Fund, a fund that would likely run dry within the next few years without the advent of new tax. It has been tagged with the term “complicated” because it is to be imposed on some, but not all, real estate transactions. For the most part, it will tax investment income from interest, dividends, rents (less expenses), and capital gains (less capital losses), but only on individuals with an adjusted gross income (AGI) above $200,000 or on couples filing a joint return with more than $250,000 AGI. Additionally, the tax will be imposed only on the excess of AGI over $200,000 or $250,000 for couples, not the entire AGI, meaning that even if you have $100,000 in capital gains, the 3.8% tax will only apply to the amount that you are in excess of the AGI threshold set at $200,000 for individuals, $250,000 for couples.

The second tax we wanted to make you aware of is the additional 0.9% tax on the earned income of higher income individuals, also dedicated to funding the Medicare budget. This takes the previous 1.45% Medicare tax rate to 2.35% for those individuals with an AGI of $200,000 or $250,000 on a joint return. This tax is more relevant to our business and industry because employers will be required to withhold the additional Medicare tax from high earning employees’ paychecks, and may want to communicate why they are required to do so. Unlike the 3.8% tax which is only imposed on investment income, this additional 0.9% tax is imposed on all earned income above the AGI threshold amount. To offer an easy example: an individual with an adjusted gross income of $270,000 in 2013 will exceed the threshold by $70,000 and will therefore be taxed 0.9% on $70,000 or (.009 x 70,000) owing $630 in additional Medicare tax.

For further inquiries on the specific complications of these new tax laws we have to ask that you please direct them to a legal attorney or tax advisor.

For More Information
For more information about this ACA Pathways or about any other health care reform-related provisions, please contact your Burnham Benefits consultant or Burnham Benefits at:

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This ACA Pathways is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.

The information contained in this ACA Pathways includes emerging health care news from a limited perspective and does not encompass all views. The information was selected from a wide range of sources selected on the basis of their potential impact on employers and/or their employee benefit plans. For more information, please contact Burnham Benefits.

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