By KATHLEEN PENDER
San Francisco Chronicle
April 07, 2010
The Medicare tax increases start in 2013. The $200,000 and $250,000 thresholds are not indexed for inflation, so they eventually could reach into the middle class.
The two new Medicare taxes are estimated to raise about $210 billion over 10 years, which accounts for 48 percent of the new tax revenue associated with the act, according to accounting firm Deloitte.
Other parts of the two health care bills signed into law last month will affect people at all income levels. Starting next year, for example, people can no longer use their flexible spending accounts to buy over-the-counter drugs.
Here's a closer look at these and other provisions affecting individual taxpayers, and how much revenue they are expected to raise over 10 years.
-- Higher Medicare tax on earned income: Today, employees pay 1.45 percent of their wages for Medicare tax. The employer pays an additional 1.45 percent of employee wages. Self-employed people pay the employer and the employee's share, or 2.9 percent, of their self-employment income.
Unlike Social Security tax, which does not apply after a certain level of annual income, Medicare tax applies to an unlimited amount of income.
Starting in 2013, employees and the self-employed will pay an additional 0.9 percent in Medicare tax on employment income that exceeds $200,000 per year for single people and $250,000 for couples filing jointly.
Impact: A single person with $250,000 in earnings or a couple with $300,000 would each pay 0.9 percent on $50,000 in earnings, or $450.
If a husband and wife each earn $150,000, their employers won't withhold the additional Medicare tax, but the couple will have to pay it when they file their tax return.
The tax increase does not raise the employer's share of the Medicare tax.
Ten-year revenue estimate: $86.8 billion.
-- Medicare tax on investment income: Today, Medicare tax applies only to income from employment.
Starting in 2013, high-income people will also pay a 3.8 percent Medicare tax on most types of investment income over a certain threshold, including interest, dividends, capital gains, rental income, annuities and royalties. The new tax will not apply to retirement-plan distributions or tax-exempt interest from municipal securities.
The tax is applied to the lesser of the taxpayer's net investment income or the amount of modified adjusted gross income that exceeds $200,000 for singles and $250,000 for couples.
For example, a single man with $220,000 in adjusted gross income and $40,000 in investment income would pay 3.8 percent on $20,000 (the amount over $200,000) or $760, according to publishing firm CCH.
Revenue estimate: $123.4 billion.
-- Applying the two Medicare taxes: The 0.9 percent tax on earned income and the 3.8 percent tax on investment income will be applied separately. Deloitte gives an example:
A single woman has $190,000 in wages, $30,000 in investment income and adjusted gross income of $210,000. She would owe no additional tax on her wages but would pay 3.8 percent tax on $10,000, the amount of income that exceeds $200,000.
-- Reining in flex accounts: Beginning in 2013, employees cannot put more than $2,500 per year into a cafeteria plan flexible spending account for health care. These accounts let employees set aside part of their salary before taxes to pay for medical expenses. Today there is no federal limit, but many employers set limits ranging from $2,500 to $7,500 annually.
The $2,500 limit is indexed to inflation.
Ten-year revenue estimate: $13 billion.
-- No more OTC drugs: Starting next year, employees will no longer be able to use money from their flexible spending accounts to pay for over-the-counter drugs. They will still be able to use them for prescription drugs and insulin. This new rule also applies to health savings accounts and Archer medical savings accounts, which are other ways to save pre-tax money for health care expenses.
Estimated revenue: $5 billion.
-- Bigger penalty: People who take money out of a health savings account or Archer medical savings account and don't use it for qualified medical expenses will pay a 20 percent penalty on the amount starting next year. Today, the penalty is 10 percent for HSAs and 15 percent for MSAs.
Estimated revenue: $1.4 billion.
-- Higher hurdle for medical deduction: Today, people who itemize deductions can write off unreimbursed medical expenses that exceed 7.5 percent of their adjusted gross income. This threshold rises to 10 percent of adjusted gross income starting in 2013 for most people and in 2017 for everyone else.
From 2013 through 2016, if a person or the person's spouse is at least 65 at the end of the year, the threshold remains at 7.5 percent.
Revenue estimate: $15.2 billion over 10 years.
-- Penalizing the uninsured: Starting in 2014, most Americans not eligible for Medicare, Medicaid or other government health care must buy a minimum level of coverage or pay a tax penalty.
The annual penalty is a flat dollar amount or a percentage of income, whichever is greater. The flat amount for an adult starts at $95 in 2014 and increases to $695 by 2016. After that, it is indexed to inflation. The penalty for a minor dependent is half the adult amount.
The percent of income starts at 1 percent in 2014, rising to 2.5 percent in 2016 and thereafter. A family's total penalty generally cannot exceed three times the adult flat amount.
-- Subsidies for health coverage: Starting in 2014, lower-income people can get a tax credit to help pay for health care. The credit will be on a sliding scale for people whose income falls between 100 and 400 percent of the poverty line. The Internal Revenue Service will determine eligibility.
Scripps Howard News Service, http://www.scrippsnews.com
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